JPM 2009 Gypsum

Global Equity Research 08 September 2009

Gypsum

Improving outlook for demand, but pricing remains a concern with excess capacity

Building Materials

Mike BettsAC

(44-20) 7325-8976 [email protected]

J.P. Morgan Securities Ltd.

See page 24 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

US Wallboard industry % Price1

10356085

110

1985 1990 1995 2000 2005

20

80

140

200Utilisation (LHS)

Selling price (RHS)

Source: BPB, J.P. Morgan estimates. 1. Indexed to 1985.

• Summary. Profitability declined in the US during Q2 as capacity utilisation fell to 49% and wallboard prices weakened slightly. We expect these trends to be reversed as the US housing market recovers. An improvement is in our view also likely in Europe, but with a lag to the US. We remain more cautious on the outlook for emerging markets, where wallboard is normally used in the non-residential sector.

• Beneficiary of the expected recovery in housing. We expect the recovery in housing, which is starting now in the US, to be followed during 2010 by an upturn in many of the major European housing markets. This will benefit demand for plasterboard, with housing in total (new, improvements and repairs & maintenance) accounting for around 60% of wallboard demand in the US, and for around two-thirds of demand in Europe.

• Pricing at risk from low capacity utilisation. Market leader USG estimates that the US wallboard industry operated at a capacity utilisation rate of only 49% in the second quarter of this year. Demand therefore needs to almost double for capacity utilisation to exceed 90%, which is where Eagle Materials estimates that the US wallboard industry has pricing power. The industry is more concentrated in Europe, resulting in more stable prices. Conversely, excess capacity in emerging markets could depress plasterboard prices in these countries.

• Significant cost reductions in recent months. Wastepaper and natural gas are normally the most significant costs for a plasterboard producer. The spot price of natural gas has fallen by 85% since July 2008 in the US. Although the cost of wastepaper has recently increased, it’s still 43% below its April 2008 peak.

• Importance of gypsum to company profitability. It accounts for 45% of our estimate of Eagle Materials mid-cycle profitability, 11% for Saint-Gobain and 3% for Lafarge. We are raising our rating for Eagle Materials from Underweight to Neutral due to the improving outlook for the US housing market.

Summary of EPS, target price and rating changes 2009E EPS 2010E EPS Target price1 Rating2

Sector/Company Original New % Diff Original New % Diff Old New % Diff Old NewEagle Materials3 $0.95 $0.97 2.4% $1.24 $1.41 14.1% $28.0 $28.0 0.0% UW NLafarge €3.12 €3.69 18.2% €2.65 €3.24 22.2% €47 €67 42.6% N NSaint-Gobain €0.89 €0.91 2.3% €1.56 €1.57 0.9% €36.0 €39.0 8.3% OW OW

Source: J.P. Morgan estimates. 1. All target prices are mid-cycle P/E ratio based, timeframe 12-months (September 2010).. 2. Based on expected share price performance over the next 12 months relative to the sector. 3. Estimates of basic EPS for Y/E March 2010 and 2011.

2


Mike Betts (44-20) 7325-8976 [email protected]

Table of Contents Structure of Gypsum section ..................................................3 Volumes ....................................................................................4 Global ..........................................................................................................................4 Europe..........................................................................................................................4 North America .............................................................................................................6 Capacity ..................................................................................10 Costs .......................................................................................12 Prices.......................................................................................16 Europe........................................................................................................................16 North America ...........................................................................................................16 Margins....................................................................................18 Corporate activity ...................................................................21 Ratio analysis .........................................................................23

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Structure of Gypsum section The gypsum section of this report is split into seven sections:

• Volumes. The outlook is examined for plasterboard volumes globally, and a more detailed analysis is made of the prospects in Europe, North America and in emerging markets.

• Capacity. This section highlights capacity closures and new capacity openings that have already been announced, primarily in the US.

• Costs. Recent trends in the cost of wastepaper and natural gas are highlighted.

• Prices. The current level of prices is described in Europe and North America.

• Margins. The trend in the operating margins of Lafarge and Saint-Gobain's gypsum businesses is examined, followed by a more detailed analysis of the margins being achieved in Europe and North America.

• Corporate activity. Although the top four companies control almost 60% of global capacity, there is in our view potential for further consolidation in North America.

• Ratio analysis. This section of the report concludes by analysing the current trading multiples of Eagle Materials and USG.

4



Volumes Global Lafarge estimated that around 7.2bn square metres of plasterboard were sold globally in 2006, the latest data available, 48% in North America, 24.5% in the Asia Pacific region, 24% in Europe, and 3.5% elsewhere (Figure 1). Lafarge estimates that the rate of growth in demand for plasterboard in 2006-10 will vary from 2% pa in North America and Japan to 9% pa elsewhere in Asia (Table 1).

Figure 1: Worldwide Plasterboard Demand in 2006 Table 1: Forecast rate of volume growth 2006-2010 % split of the 7.2 billion square metre market CAGR %

Rest of the w orld 1.5%

Latin America 2%

Eastern Europe 7%

Western Europe 17%Asia Pacific

24.5%

North America 48%

North America 2% Western Europe 3% Eastern Europe 8% Latin America 8% Middle East and Africa 8% Asia and Oceania 9% Japan 2%

Source: Lafarge. Source: Lafarge.

Lafarge reported in its "Sustainability Report 2006", the latest available data, that China is now the world’s third largest plasterboard market, and is delivering about 75% of global market growth.

Europe Historically, demand for plasterboard in Europe has increased by an average of 5-6% per annum. Lafarge reported a 0.9% decline in its western European plasterboard volumes in 2008, with a 1.6% increase in the first-half of the year being followed by a more than 3% decline in the second-half. The rate of decline worsened to 15.5% in the first-half of this year. We expect a further but smaller decline in the second-half of this year, followed by a slow recovery starting in 2010.

New housing, housing renovation and commercial work each account for around one-third of European plasterboard consumption.

New housing. Plasterboard is used towards the end of the construction process and therefore demand is more closely linked to housing completions than housing starts. Table 2 shows that we estimate that housing completions in France, Germany, the UK and Spain declined by around 10% in 2008, and by around 16% if Spain is excluded. The latter is a sizeable housing market, but a comparatively small market for plasterboard. Excluding Spain, we expect further reductions of 10% in 2009 and 3% in 2010, followed by an increase of 7% in 2011.

65% of global plasterboard demand is in North America and Western Europe

Volumes in Europe declined by 16% in H1-09

We forecast that demand for European plasterboard will decline further in 2009

5



Table 2: Housing completions in France, Germany, UK and Spain 000 2007 2008 2009E 2010E 2011E Europe France1 425 369 350 360 375 Germany 211 176 162 165 183 Spain2 647 633 250 170 160 UK 207 168 126 96 108 Total 1,490 1,346 888 791 826 (% change) -2% -10% -34% -11% 4% Total (excluding Spain)2 843 712 638 621 666 (% change) -3% -16% -10% -3% 7% Source: J.P. Morgan estimates. 1. Starts. 2. Data excludes Spain due to the size of the new housing market in that country, and that market’s comparatively low usage of plasterboard.

Housing renovation work. At its June 2009 conference, Euroconstruct forecast that European housing renovation volumes would decline this year by around 3.5%, and by a further 0.4% in 2010. It forecast that they would then subsequently increase by around 1.7% in 2011.

Table 3: Slower rate of growth forecast in housing renovation and modernisation work % change on previous year 2007 2008 2009E 2010E 2011E France 2.0% 0.5% 2.0% 3.0% 2.5% Germany 3.8% 4.8% -2.8% 1.6% 1.8% Italy 0.7% -2.9% -4.9% -2.5% 0.9% Spain 3.4% -15.6% -18.0% -5.0% 1.5% UK -0.5% 4.5% -4.6% -3.1% 0.9% Europe1 2.6% -0.1% -3.5% -0.4% 1.7% Source: Euroconstruct, June 2009 1. The 19 countries that Euroconstruct compiles forecasts for.

Non-residential (offices, retail, leisure, etc). Euroconstruct expects a more substantial decline in demand for non-residential work. It estimates a reduction of around 8.1% this year, followed by a further fall of 4.3% in 2010 and no improvement in 2011.

Table 4: Rate of growth also forecast to slow in non-housing work % change on previous year

2007 2008 2009E 2010E 2011EFrance 4.3% -1.3% -6.1% -2.4% 0.5%Germany 5.6% 7.9% -6.5% 0.5% -1.5%Italy 0.3% -4.4% -6.0% -0.6% 1.4%Spain 2.3% -6.3% -17.9% -11.2% 1.7%UK 4.8% 1.6% -5.8% -5.1% -1.0%

Europe1 5.0% 0.8% -8.1% -4.3% 0.0%Source: Euroconstruct, June 2009 1. The 19 countries that Euroconstruct compiles forecasts for.

We also expect plasterboard to continue to replace plaster and other forms of wet construction, and to benefit from its thermal and acoustic insulation properties, as building regulations continue to be tightened in this regard. We estimate that the boost to demand from replacement of plaster and tougher building regulations will possibly add around two percentage points on average to annual demand growth.

6



Overall, therefore, we estimate that demand for plasterboard in Europe will decline by around 5.3% this year, and by a further 0.5% in 2010. We then expect it to begin to recover, increasing by around 5.0% in 2011.

Table 5: Forecasts for European plasterboard volumes % End-use % 2008E 2009E 2010E 2011E New Housing1 33% -15.5% -10.4% -2.7% 7.2% Housing renovation 33% -0.1% -3.5% -0.4% 1.7% Non-housing 33% 0.8% -8.1% -4.3% 0.0% Trend 2% 2% 2% 2% Estimated growth -2.9% -5.3% -0.5% 5.0% Source: J.P. Morgan estimates. 1. Data excludes Spain due to the size of the new housing market in that country, and that market’s comparatively low usage of plasterboard.

North America US wallboard shipments increased by more than 30% from 2001 until mid-2006 (Figure 2). Subsequently volumes have declined in every quarter, with the rate of decline worsening in each quarter since Q4-2007 (Figure 3). We expect US wallboard shipments in 2009 to be almost half of their 2005 peak level.

Figure 2: US Wallboard shipments 1980-2008 Figure 3: 2006-09 quarterly percentage changes in volume of US wallboard shipments

Billion Square feet pa % change vs same quarter in previous year

05

10152025303540

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

-10%-16% -13%-16%

-19%

-28%-30%-32%

11%3%

-17%-16%

-7%-11%

-40%-30%

-20%-10%

0%10%

20%

2006 Q1 2007 Q1 2008 Q1 2009 Q1

Source: US Gypsum Association. Source: US Gypsum Association.

Saint-Gobain and Lafarge both have gypsum businesses in North America but, unlike many of their competitors, Saint-Gobain does not publish detailed quarterly results for its US wallboard business. The shipments and pricing data also ceased to be available for Lafarge after it acquired the minorities in its North American subsidiary in the second quarter of 2006. The US shipment data for 2009 for the major producers publishing this data and for the industry as a whole are shown in Table 6. For the three companies publishing this data, Temple Inland gained market share in H1-2009 and USG lost it. The trend in Eagle’s shipments was similar to that of the overall market. USG reported that its loss of market share was part of "its continuing efforts to improve profitability". The strength in Temple Inland shipments in the first six months of 2009 may have been partly due to the easier comparative, after its volumes grew more slowly than the overall market in January to June 2008.

Forecasting near halving in US wallboard shipments 2005-09

USG gained and Temple Inland lost market share in H1-2009

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Table 6: US wallboard shipments in 2009 Million sq ft Company Q1 09 Q1 09 vs Q1 08 Q2 09 Q2 09 vs Q2 08 Eagle 447 -25% 445 -31% Temple-Inland 283 1% 259 -7% USG 1,310 -38% 1,180 -38% Industry 4,800 -29% 4,600 -32% Source: Company data.

As Figure 4 shows, new residential work accounted for 34% of plasterboard usage in the US in 2008, down from 46% in 2006. If residential repairs, maintenance and improvement work is included, housing in total accounted for nearly 60% of all wallboard demand in the US last year. Demand for wallboard typically lags housing starts by around three months and housing permits by around six months. US wallboard demand has been reduced by the weakness in the US housing market since mid-2006. The US housing market continued to decline during the first-half of 2009, but we now expect it to slowly improve (see ‘US GDP and construction data’ table in the Country Forecasts Appendix report released today) Conversely, we expect demand from the commercial sector to continue to weaken during the second-half of this year and in 2010. We expect these trends in end-demand to result in a decline in wallboard demand in the US of around 23% in 2009, but are forecasting an increase of around 10% in 2010.

Figure 4: US plasterboard end-use, 2008

New residential

34%

Other5%

RMI48%

New commercial

13%

Source: USG.

We expect US wallboard shipments to decline by around 23% in 2009, but are forecasting an increase of around 10% in 2010.

8



Emerging markets look attractive The main attraction of emerging markets is the expected high long-term growth rate in plasterboard demand (Figure 5).

Figure 5: Plasterboard consumption vs per capita GDP (typical trend of what happens to wallboard consumption as GDP per capita increases) Square metres per head

0.0

2.0

4.0

6.0

8.0

10.0

2,000 4,000 6,000 8,000 10,000 12,000 18,000 24,000 30,000 Source: Company reports and J.P. Morgan estimates.

Current consumption levels in emerging markets are significantly below the global average of 1 square metre per capita. The latter is boosted by higher rates of consumption in developed countries. Part of the variation in consumption also reflects the different forms of construction used. Consumption is high at 7-11 square metres per capita in the US, Canada and Australia where dry forms of construction are used. In Western Europe, where wet forms of construction are normally used, consumption tends to be lower, typically at around 3-4 square metres per capita. The rate of wallboard consumption also varies with the ability to afford the extra cost of plasterboard, despite its faster construction time and higher-quality finish. As developing markets become developed markets, we expect plasterboard consumption in these countries to increase significantly. In emerging markets, demand typically initially comes from the commercial sector, primarily hotels and offices. Demand then normally follows later from the residential sector.

9



Table 7: National variations in plasterboard consumption Square metres per capita per annum Country ConsumptionUS 10.8Canada 9.5Australia 7.5UK 4.8Japan 4.4Finland 3.9France 3.9Sweden 3.9South Korea 3.8Denmark 3.6Austria 3.3Belgium 2.7Netherlands 2.2Germany 2.1Spain and Portugal 2.0Poland 1.9Chile 1.6Singapore 1.3Italy 1.1Taiwan 1.0Thailand 1.0Romania 0.7Russia 0.7Malaysia 0.6South Africa 0.6Greece 0.5Ukraine 0.5Argentina 0.3Mexico 0.3China 0.3Venezuela 0.2Egypt 0.2Indonesia 0.1Colombia 0.05Philippines 0.04Ecuador 0.04Vietnam 0.03Brazil 0.03Source: BPB September 2005 presentation, J.P. Morgan estimates.

Of the major plasterboard companies, Lafarge has the highest exposure to emerging markets. In 2008, 30% of the sales of its Gypsum division were outside Western Europe and North America. Its joint venture with Boral in Asia has around 300m square metres per annum of production capacity. By contrast, 17% of the sales of Saint-Gobain’s gypsum division were outside Western Europe and North America in 2007, which is the latest available data. Among the other top four producers globally, USG operates mainly in the US, but also has operations in Canada and Mexico. National Gypsum operates only in North America.

10



Capacity Despite wallboard demand almost halving in the last three years, probably to 18.5-19.0 billion square feet in 2009, capacity has only declined by 6% to 36.2 billion square feet per annum currently. This has resulted in the industry’s capacity utilisation falling from a sold-out situation in early 2006 to a utilisation rate of 49% that USG estimates the industry operated at in the second quarter of this year. Although the US wallboard industry has closed around 7.2bn square feet of annual capacity in the last couple of years, we estimate that around 5.7 billion square feet per annum of new capacity has opened. Eagle and Lafarge have both added more capacity than they have closed. In our view, the wallboard industry needs to close more of its higher-cost ($110-120 per 1,000 sq ft) natural gypsum plants.

Table 8: Change in US wallboard capacity1 since 2006 Billion square feet Closures Openings Net USG (2.686) 1.480 (1.206) National (1.572) 1.000 (0.572) CertainTeed (0.991) 0.750 (0.241) Georgia Pacific (1.286) 0.600 (0.686) Eagle 0.750 0.750 Lafarge (0.356) 1.095 0.739 Temple Inland 0.000 0.000 Pabco (0.299) (0.299) Total (7.190) 5.675 (1.515) Source: Company reports and J.P. Morgan estimates. 1. Data in this table only takes into account the opening or closure of lines. It does not take into account any reductions in the number of shifts worked.

The plant closures have been widespread across the US. Conversely, the new plants that have opened in the US during the past three years have been concentrated in the east.

Figure 6: US wallboard plant openings and closings

31

Industry Capacity AdditionsCapacity Closures

31

Industry Capacity AdditionsCapacity Closures

Source: Eagle Materials.

US wallboard industry operated at only 49% of capacity in Q2-2009

New openings concentrated in the east

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Capacity is normally defined on a 24/7 basis, with one shift off per week for maintenance. At the current low levels of capacity utilization (46% in Q2-2009), the plants are typically only running for 3 days a week, with two twelve hour shifts. A further 8 hour shift is normally worked on the fourth day to clean up the plant.

The new plants mainly use desulphurised gypsum, which is normally cheaper than naturally occurring gypsum. Desulphurised gypsum is a waste product generated from the smokestack scrubbers of adjacent coal-burning power plants. It is also a by-product of certain chemical processes. It is therefore normally cheaper than naturally occurring gypsum. The desulphurised gypsum plants are also normally larger than the existing plants, operate at faster line speeds, produce a better-quality product, consume less energy and require fewer workers than existing plants. Their cost of production should therefore be lower, enabling them to service economically a larger area than many of the existing plants.

Figure 7 shows the location and ownership of the wallboard plants currently operating in the US and the two that are still planned for the future. The two new plants are both in the western part of the US, with National Gypsum planning a new plant in Arizona which is currently due to open in 2011 and USG in California, whose opening is currently scheduled for 2014. In our view their openings could be delayed further due to weak demand. Both plants are planning to use natural gypsum, as desulphurised gypsum is less readily available in these states, where power stations aren’t normally burning high-sulphur coal.

Figure 7: Location of wallboard plants1 in US

AMERICAN

TEMPLE

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

NGC

NGC

NGC

NGC

NGC

NGC

NGC

NGC

GPNGC

NGC

USG

NGC

NGCNGC

NGC

NGC

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

USG

USG

USG

USG

AMERICAN

CT

CT

CT

CT

NGC

PABCO

PABCO

TEMPLE

TEMPLE

TEMPLE

LAFARGE

LAFARGE

AMERICAN

AMERICAN

AMERICAN

CTCT

NGC

Existing Plant

New Plant

USG

LAFARGE

NGC

USG

CT

AMERICAN

TEMPLE

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

NGC

NGC

NGC

NGC

NGC

NGC

NGC

NGC

GPNGC

NGC

USG

NGC

NGCNGC

NGC

NGC

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

USG

USG

USG

USG

AMERICAN

CT

CT

CT

CT

NGC

PABCO

PABCO

TEMPLE

TEMPLE

TEMPLE

LAFARGE

LAFARGE

AMERICAN

AMERICAN

AMERICAN

CTCT

NGC

Existing Plant

New Plant

USG

LAFARGE

NGC

USG AMERICAN

TEMPLE

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

USG

NGC

NGC

NGC

NGC

NGC

NGC

NGC

NGC

GPNGC

NGC

USG

NGC

NGCNGC

NGC

NGC

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

GP

USG

USG

USG

USG

AMERICAN

CT

CT

CT

CT

NGC

PABCO

PABCO

TEMPLE

TEMPLE

TEMPLE

LAFARGE

LAFARGE

AMERICAN

AMERICAN

AMERICAN

CTCT

NGC

Existing Plant

New Plant

USG

LAFARGE

NGC

USG

CT

Source: Company reports. 1. Plants are categorized as new if they opened since the beginning of 2007 or are still to open.

Revised shift patterns

Increasing usage of desulphurised gypsum

No new capacity before 2011, at the earliest

12



Costs The cost of producing plasterboard increased significantly in the US and, to a lesser extent in Europe, during the first-half of 2008, as the cost of natural gas and wastepaper increased. Although the cost of both subsequently declined, the cost of wastepaper has begun to increase again in recent months.

Plasterboard essentially consists of two sheets of paper sandwiching a layer of gypsum. Figure 8 shows the main processes involved in its manufacture if naturally occurring gypsum is used. The initial stages of the raw materials’ preparation are different if desulphurised gypsum is used. There are four major stages involved in producing plasterboard.

Raw materials preparation. Gypsum rock is extracted from the mine or quarry and transported to the plasterboard plant where it is crushed and blended with waste board. It is then screened to ensure that no pieces are more than two inches in diameter. The gypsum is subsequently dried in a large rotating kiln or oven, which evaporates any surface water. It is ground into a fine powder and placed into a calciner where it is heated to remove any excess water that is chemically bonded to the gypsum itself. The resulting stucco is mixed with any dry additives that are required to increase the fire or moisture resistance of the board, or to improve its strength or hardness.

Forming the board. The resulting material is placed in a pin mixer at the beginning of the board-forming line and mixed with soap foam and accelerators. The resulting slurry is spread between two paper sheets that act as a mould. The liner paper is normally made from wastepaper. Two different quality papers are used: ivory stock is used for the face of the plasterboard and grey stock is used for the reverse side. The edges of the liner are scored and possibly chamfered to ensure the precise folding of the paper to form the edges of the board. The liner is placed on racks above and below the exit of the pin mixer and the stucco slurry is sandwiched in between. The slurry then starts to dry, expanding as it does into the liner paper, providing the board's structural strength.

Cutting to size. The long, continuous sheet of plasterboard travels up to 800 feet on moving belts and rollers. This takes about four minutes, during which the slurry hardens sufficiently for the plasterboard to be cut into standard length sheets.

Drying. The boards are then turned over, cream-side up and placed into a multi-stage kiln to dry for about 40 minutes. After exiting the kiln, the board is trimmed and its edges are taped. It is then stacked and placed in a warehouse prior to being shipped to customers.

Costs declining

13



Figure 8: Plasterboard production line

CALCINATION WEIGHING

DRY TRANSFER

Additives

Foaming agent water

Edgefixing

MIXING(4 sec)

Cream sidepaper preparation

Board Forming

Grey sidePaper preparation

CUTTER

Rejects

Hardeningabout 250 m

(4 mn)

Flipper

WET TRANSFER

STORAGE

Edge taping

Packaging

8 or 10 stages DRYER (40 mn)

CALCINATION WEIGHING

DRY TRANSFER

Additives

Foaming agent water

Edgefixing

MIXING(4 sec)

Cream sidepaper preparation

Board Forming

Grey sidePaper preparation

CUTTER

Rejects

Hardeningabout 250 m

(4 mn)

Flipper

WET TRANSFER

STORAGE

Edge taping

Packaging

8 or 10 stages DRYER (40 mn)

Source: Lafarge.

We estimate that normally around 75% of the costs of manufacturing wallboard are variable, with only 25% fixed. However, at very low levels of capacity utilisation, like those currently occurring in the US (50-55%), 35-40% of the costs may be fixed.

Paper and energy account for 50% of the variable cost items in the manufacture of plasterboard:

Table 9: Breakdown of the variable cost of manufacturing and distributing plasterboard Cost %Paper 25%Energy - Two-thirds gas 17%- One-third electricity 8%Gypsum 13%Chemicals 8%Production labour 16%Freight 8%Other 5%Source: Company data, J.P. Morgan estimates.

75% of costs are normally variable

Major variable manufacturing costs:

· 25% paper

· 25% energy

14



Plasterboard liner accounts for 25% of the variable cost of manufacturing plasterboard. It is normally manufactured from wastepaper. US producer price data for wastepaper indicate that the cost of wastepaper in the US declined by 59% between April 2008 and January 2009. Although it has subsequently increased by 41%, it is still 43% below its April 2008 peak.

Figure 9: 1984-2009 monthly producer price index for wastepaper Figure 10: Cost of natural gas, Henry Hub Index: December 1982=100 $/mbtu

0

100

200

300

400

500

600

1984 1987 1990 1993 1996 1999 2002 2005 2008

`

0

4

8

12

16

20

2004 2005 2006 2007 2008 2009 Source: US Bureau of Labor Statistics. Source: Datastream.

Energy costs are the second major variable cost in manufacturing plasterboard, accounting for around 25% of total variable costs, with two-thirds accounted for by gas and one-third by electricity. The spot price of natural gas in the US has fallen by 85% since July 2008, although the impact has often been delayed by the hedging typically undertaken by the wallboard companies.

USG, the largest manufacturer of wallboard in the US estimated on its April 2009 post-results conference call that a $1 per million btu reduction in the cost of natural gas reduced its wallboard production costs by around $2.25 per 1,000 square feet.

The cost of electricity has also been increasing in recent years in both the US and Europe (see figure titled ‘Average electricity cost to US industrial users’ in our Cement sector report published today).

Figure 11 shows the cost saving that can be achieved by building a new wallboard plant in the US. It assumes a selling price of $100 per 1,000 square feet for four different types of plant. The cost structures are as of September 2007, when the article from which the chart is extracted was published.

• Older Rock: This is based on the cost structure of an old plant that has to bring in gypsum (e.g. from Nova Scotia to Florida). The comparatively high cost structure of this type of plant results in a loss of around $12 being incurred at a selling price of $100 per 1,000 sq ft.

• New FDG. A modern plant, built close to and using Flue Gas Desulphurised gypsum. It has a production cost around $21 per 1,000 sq ft lower than an older plant that uses imported natural gypsum. The largest savings are in gypsum ($13 per 1,000 sq ft), labour ($3 per 1,000 sq ft) and energy ($3 per 1,000 sq ft). In addition there are normally savings in additive costs, improvements in yields and lower overheads which typically total an additional $5 per 1,000 sq ft. However, these savings are partially offset by higher freight costs resulting in a net saving of around $21 per 1,000 sq ft.

The cost of wastepaper has recently increased but its still 43% below its April 2008 peak

Spot price of natural gas has fallen by 85% since July 2008 in the US

$1 per m btu decline in cost of natural gas reduces wallboard production cost by $2.25 per 1,000 sq ft

Cost of electricity increasing

Potential cost savings from opening new plants

15



• Best practice. This shows what the cost structure could be if all the best available proven technology was implemented. Although additional capital investment would be required, it is possible to reduce costs by another $16 per 1,000 sq ft. At a selling price of $100 per 1,000 sq ft, these plants are shown as generating a profit of $25 per 1,000 sq ft.

• Next generation. This is based on a potential further cost saving of $27 per 1,000 sq ft. It assumes the increased availability of desulphurised gypsum will mean that companies could ultimately again be paid to use it. It also assumes energy costs will decline as cheaper sources are used and the amount consumed reduces as the weight of wallboard is reduced. At a selling price of $100 per 1,000 sq ft, the next generation of plants would have a cash margin of over 50% at September 2007 cost levels. They would still produce a 10% margin at a selling price of around $55 per 1,000 sq. ft.

Figure 11: Analysis of cash cost for producing wallboard $/000 sq ft

-$20

$0

$20

$40

$60

$80

$100

$120

Older Rock New FGD Best Practise Nex t Generation

Net Margin

Central Ov erheadds

Selling Costs

Factory Ov erheads

Transport Costs

Semi-Variable Ov erheads

Scrap

Utilities

Other Raw Materials

Gy psum

Liner

Direct Labour Source: “Survival Economics 2008”, Bob Bruce, Innogyps Inc, Global Gypsum Magazine, September 2007 1. A selling price of $100 per 1,000 sq ft has been assumed.

In view of these potential cost savings, we expect more new capacity to be commissioned in the longer term, and old plants to be closed as the industry continues to reduce costs in order to generate acceptable returns.

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Prices Europe Table 10 shows our estimate of the current price of plasterboard in five of the major European countries. The weakness in demand and excess capacity in Germany and Poland resulted in prices there being, on average, lower than elsewhere in Northern Europe. However, there was a partial recovery in prices in these two countries during 2005-07, particularly in Germany. Wallboard prices increased by 3-4% across Europe in the first-half of this year. Lafarge reported a non-volume increase, which is mainly prices, of 3.8% in its Western European plasterboard business when comparing the first-half of 2009 with the same period last year.

Table 10: Current plasterboard prices Price1 per square metre of standard 12.5m plasterboard Country Price (€)France 1.60UK 1.50Italy 1.40Germany 1.20Poland 1.20Source: Company data, J.P. Morgan estimates. 1. Differences may partly reflect the different products used in each country.

North America In the US, there has been a close correlation between wallboard pricing and capacity utilisation over the past 20 years (Figure 12). On its 25 July 2006 conference call Eagle Materials stated that US wallboard prices have tended to weaken historically when the industry’s rate of capacity utilisation has declined below 90%. Capacity utilisation has fallen substantially since mid-2006, resulting in substantial price declines (Figure 13). USG estimated that the US wallboard industry was only operating at a capacity utilisation rate of 49% in Q2-2009. Prices increased in each of the four quarters Q2-2008 to Q1-2009, but declined slightly in Q2-2009. In our view, these pricing trends probably reflected changes in the cost of natural gas, together with the industry’s hedging policies, which often involve fixing the cost of natural gas for several quarters ahead.

Figure 12: Pricing versus capacity utilisation in US wallboard Figure 13: 1989-2009 quarterly US wallboard price data reported by USG

% Price: indexed to 1985 $ per 000 sq. ft.

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6080100120140160180200

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Wide variation in wallboard prices across Europe

Wallboard pricing historically closely correlated to capacity utilisation

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Table 11 shows the average selling prices as reported by the companies, for US wallboard for the major producers during 2009. USG’s average selling price has remained comparatively high. In our view, this is attributable to several factors. First, USG is the market leader in the US, with the highest market share. Second, its plants are concentrated in the eastern part of the US, where prices are higher because of the shortage of capacity there. Third, USG has more plants than any of its competitors in the US. This boosts productivity and reduces freight costs. The companies report selling prices after deducting freight costs. Therefore, the lower a company’s freight costs the higher the reported selling price. Fourth, USG’s product range is wider than those of most of its competitors, enabling it to achieve a higher price for its basic wallboard.

Table 11: US wallboard pricing1 in 2009 $, per 1,000 square feet of 1/2 inch wallboard Company Q1 Q1 09 vs Q4 08 Q2 Q2 vs Q1 Eagle 109.89 6% 100.00 -9% Temple-Inland NA -2% NA -6% USG 121.42 2% 120.79 -1% Source: Company data. 1. Ex works prices, excluding delivery charges. Temple-Inland only publishes the % change.

Two of the three companies in Table 11 reported price increases in the first quarter of 2009. In the second quarter all three reported price declines, with the smallest at USG, reflecting its previously described strategy to preserve pricing ahead of volumes.

In our view the price declines in Q2-2009 were mainly due to a decline in production costs.

Wide variation in prices between suppliers

US wallboard prices beginning to decline again…

… mainly due to lower costs

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Margins Since 1987, the EBIT margin of Lafarge’s Gypsum division has been consistently lower than that achieved by Saint-Gobain’s gypsum business, BPB, which it acquired in November 2005. The gap between Lafarge and Saint-Gobain’s margins widened again in 2006 and in 2007. Starting in 2008, Saint-Gobain ceased to report separately the margin of its gypsum division. It combined it with its insulation division into an Interior Solutions division. The latter’s operating margin fell from 14.8% in 2007 to 9.6% in 2008, a similar reduction to the five percentage point decline in the operating margin of Lafarge’s gypsum division. This suggests that the gap between Saint-Gobain and Lafarge’s margin has not narrowed. We do not expect it to decline significantly in the longer term, as part of the difference reflects Lafarge’s structurally lower margins in Europe, which are described below. This year, we expect Lafarge’s gypsum margin to be slightly higher than last year, but to then start to recover in 2010 and 2011.

Figure 14: Comparison between the EBIT margins of the gypsum divisions of Lafarge and BPB/Saint-Gobain %

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Source: Company data, J.P. Morgan estimates. 1. As BPB had a March year-end, calendar year data have been calculated on a weighted-average basis. 2002 margin is before EU fine. No data is available for BPB for 2005 due to its acquisition by Saint-Gobain, and from 2008 onwards after Saint-Gobain stopped reporting separate results for its Gypsum division.

The profitability of Lafarge Gypsum’s operations in Europe was consistently lower than BPB’s until 2004, after which the data has no longer been available for Saint-Gobain. We estimate that Lafarge’s margins are probably still lower. In our view, this may be because Lafarge concentrates on plasterboard, whereas Saint-Gobain also has a sizeable plaster business with comparatively high margins, particularly in the UK. Lafarge Gypsum is also only around two-thirds the size of Saint-Gobain in Europe. As Knauf, the third major company in Europe, is privately owned, its results are not publicly available.

Lafarge’s gypsum margins have been consistently lower than BPB/Saint-Gobain’s

Lafarge’s margins comparatively low in Europe

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Figure 15: EBIT margins1 of Lafarge’s and Saint-Gobain’s European gypsum businesses %

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Lafarge Saint-Gobain (BPB) Source: Company data, J.P. Morgan estimates. 1. As BPB had a March year-end, calendar year data have been calculated on a weighted-average basis. 2002 margin is before EU

fine. No European data available for BPB from 2005 onwards following its acquisition by Saint-Gobain.

All three of the companies currently reporting US margins (Figure 16), reported declining margins between Q2-2006 and Q2-2008, reflecting weaker demand, declining prices and increasing costs. Margins then began to improve, particularly for Eagle and Lafarge where they improved for three successive quarters. However, all three companies reported declining margins in the second quarter of this year. Lafarge and USG are still incurring losses at the operational level but Eagle returned to profit in the October-December 2008 quarter. Eagle Materials also has a comparatively low selling price, which supports, in our view, its claim to have the “lowest average production cost in the industry”.

Figure 16: US gypsum EBITA margins1,2 %

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BPB Eagle Lafarge USG Source: Company reports. 1. Temple-Inland has been excluded as it does not report separate sales and profits for its gypsum operations. They are included in its Forest Products division, which is dominated by its lumber operations. 2. Six-month data are shown for BPB. The data for BPB also included its Canadian businesses and its US ceilings businesses. The latter’s margins remained low during the period shown. Data for BPB has not been available since its acquisition by Saint-Gobain in December 2005.

The management of Eagle Materials attributes its higher margins to its lower cost structure:

• Liner paper (30% of its manufacturing costs). Eagle Materials manufactures its own paper. It produces thinner and therefore cheaper liner paper for its wallboard. Its paper typically weighs 40 pounds per square foot, around 10% lower than the industry average. Its thinner, lighter paper also lowers freight costs and as it absorbs less water, helps to reduce Eagle Materials energy costs.

Margins began to deteriorate again in Q2-2009 in the US

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• Energy (15% of its costs): Eagle Materials management estimates that it uses less energy than its main competitors and that it purchases the energy more cheaply. It estimates that it uses less than 2 million btus to manufacture 1,000 sq ft of wallboard, 20% less than the industry average of around 2.5 million btus, and well below the 3.0 billion required by some of the industry’s older plants. The cost per btu of natural gas is also typically lower in the South West of the US, where four of Eagle’s five wallboard plants are located, than for example in the North East of the US.

• Gypsum (10% of its costs). Eagle Materials plants are typically located on their own gypsum reserves. This limits the company’s gypsum costs to $4-5 per tonne. Many of its competitors are reliant on imported gypsum, from Nova Scotia or Spain on the Eastern side of the US and from San Marco Island (Gulf of California, Mexico) and Vancouver on the Western side. This imported gypsum typically has a delivered cost of $20-25 per ton. However, we expect this cost advantage to decline as the availability of desulphurised gypsum increases.

• Wastage. Eagle Materials management estimates that its wallboard costs are also around $10 per sq ft lower than those of its competitors due to its lower generation of waste.

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Corporate activity The plasterboard industry has consolidated during the last 10 years.

• The number of plasterboard companies globally declined from 70 in 1990 to 30 in 2003, the latest data available. Half of the companies now in existence are based in China.

• Lafarge estimates that six companies supplied 77% of the plasterboard sold globally in 2008, up from 65% in 1998.

Figure 17: Global market shares of Plasterboard sales 1998 Figure 18: Global market shares of Plasterboard sales 2008

USG16%

Georgia Pacific6%

Lafarge12%

National Gy psum

11%Knauf9%

Others28%

BPB18%

USG16%

Georgia Pacific

6%

Lafarge14%

National Gy psum

11%Knauf10%

Others23%

BPB20%

Source: BPB. Source: Lafarge, J.P. Morgan estimates.

Significant corporate activity is unlikely in Europe, in our view. There are three major gypsum companies in Europe: the Gypsum divisions of Lafarge and Saint-Gobain and the private German company, Knauf. We estimate that these three companies together control almost all of the European plasterboard market and around 90% of the European market for building plasters. Any further corporate activity in Europe therefore will in our view be comparatively small, unless Lafarge decides to include its gypsum division in its divestment program.

Table 12: European plasterboard sales market shares in 2008 Company %Saint-Gobain 43%Lafarge 28%Knauf 27%Source: J.P. Morgan estimates.

Although Koch Industries acquired Georgia Pacific in December 2005, this did not alter the market shares in the US wallboard industry, as Koch did not previously have any US wallboard operations. Prior to this there had been no further consolidation in the North American gypsum industry since 2002, when there were two major transactions.

• In January 2002, Lafarge North America acquired Continental Gypsum, which had an annual capacity of 312 million square feet. It paid $90 per thousand square feet of annual capacity. The comparatively low cost (Table 13) in our view reflected the small size and, therefore, high production cost of the plant.

Lafarge estimates that the top six gypsum companies accounted for 77% of global production in 2008

Future corporate activity is likely to be focused outside Europe, we think, unless Lafarge decides to include its gypsum division in its divestment program.

Further consolidation likely in North America, in our view

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• In April 2002, BPB paid $345m for the US plasterboard and ceiling tile assets of James Hardie in the US. This equated to $123 per thousand square feet of annual production capacity.

Table 13: Gypsum acquisitions in the US Year

Purchaser

Consideration $m

Capacity acquired million sq ft

Cost per unit $ per 1,000 sq ft

2002 BPB/James Hardie 345 2,800 1232002 Lafarge/Continental 28 312 902000 Centex/Republic 192 1,100 1752000 BPB/Celotex 270 1,800 1501997 James Hardie/Briar 97 710 1371996 Centex/Eagle 53 400 1331995 Lafarge/Domtar 83 650 1281995 Georgia Pacific/Domtar 317 2,200 144Source: BPB 2002 trading update.

Although we estimate that the top three players control two-thirds of the North American gypsum industry, there are five companies with 3-11% market shares. We therefore expect further consolidation.

Table 14: Market shares in North American gypsum market in 2008 % Company Share USG 29% National Gypsum 23% CertainTeed 15% Georgia Pacific 11% Eagle 11% Lafarge 6% Temple-Inland 3% Pabco 3% Source: Company reports and J.P. Morgan estimates.

23



Ratio analysis There are only two remaining sizeable stockmarket listed gypsum companies. These are Eagle Materials and USG, both of whom are listed in the US, where all of Eagle’s and the majority of USG’s operations are located. The weakness in the US housing market has depressed the profitability of their wallboard businesses, resulting in a substantial decline in Eagle Materials’ earnings and USG has become loss-making. Both companies therefore trade on comparatively high multiples as their profitability is currently depressed. However, in J.P. Morgan's view the multiples are reasonable. We therefore have a Neutral rating on USG (Michael Rehaut is our analyst covering USG), and we are raising our rating on Eagle Materials from Underweight to Neutral.

Table 15: Gypsum ratio analysis Current share price Market cap ($m) Enterprise value ($m) 2007 2008 2009E 2007 2008 2009E 2007 2008 2009EEagle $24 1,136 1,076 1,066 1,314 1,410 1,414USG $14 1,311 1,338 1,339 3,244 2,279 2,704 EV/Sales EV/EBITDA EV/EBIT Eagle1 1.7 2.2 2.9 5.4 8.9 10.3 6.5 12.9 16.4USG 0.6 0.5 0.8 9.3 -24.2 36.5 19.0 -4.5 -21.5Weighted average2 1.1 1.3 1.7 7.5 -9.5 24.9 13.2 3.2 -4.7 Price/Book Price/Earnings Price/Cash flow Eagle1 2.5 2.5 2.4 9.3 19.4 24.9 8.4 12.8 8.7USG 0.6 0.9 1.0 17.1 -2.9 -8.1 3.8 -14.2 18.1Weighted average2 1.5 1.6 1.6 13.5 7.1 6.5 5.9 -2.2 13.9 ROE Gearing Interest cover Eagle1 27% 13% 10% 79% 83% 65% 20.2 4.3 3.6USG 4% -30% -12% 43% 88% 104% 2.1 (6.4) (0.9)Weighted average2 15% -11% -2% 60% 86% 86% 10.5 -1.6 1.1Source: Datastream, J.P. Morgan estimates. Prices as of COB 4 September 2009 1. Annualised. 2.Weighted by market cap.

J.P. Morgan ratings

- Upgrading Eagle Materials to Neutral

- Neutral on USG

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Companies Recommended in This Report (all prices in this report as of market close on 26 August 2009) Eagle Materials (EXP/$27.02/Underweight), Lafarge (LAFP.PA/€59.60/Neutral), Saint-Gobain (SGOB.PA/€31.92/Overweight), USG Corporation (USG/$15.27/Neutral)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

1. Market Maker: JPMSI makes a market in the stock of Lafarge. 2. Market Maker/ Liquidity Provider: JPMSL and/or an affiliate is a market maker and/or liquidity provider in Lafarge, Saint-

Gobain. 3. Lead or Co-manager: JPMSI or its affiliates acted as lead or co-manager in a public offering of equity and/or debt securities for

Saint-Gobain, USG Corporation within the past 12 months. 4. Client of the Firm: Eagle Materials is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to

the company investment banking services and non-securities-related services. Lafarge is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Saint-Gobain is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. USG Corporation is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company investment banking services and non-securities-related services.

5. Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for investment banking services from Eagle Materials, Lafarge, Saint-Gobain, USG Corporation.

6. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Eagle Materials, Lafarge, Saint-Gobain, USG Corporation.

7. Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other than investment banking from Lafarge, Saint-Gobain. An affiliate of JPMSI has received compensation in the past 12 months for products or services other than investment banking from Eagle Materials, Lafarge, Saint-Gobain, USG Corporation.

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Eagle Materials (EXP) Price Chart

UW $37

UW $38 UW $29

UW $40 UW $42 UW $36 OW $29 UW $28

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage May 09, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

09-May-07 UW 48.57 40.00 31-Jan-08 UW 34.53 42.00 07-May-08 UW 36.55 38.00 28-May-08 UW 35.92 37.00 22-Jul-08 UW 23.54 36.00 10-Sep-08 UW 28.37 29.00 09-Jan-09 OW 19.35 29.00 22-Apr-09 UW 27.09 28.00

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Lafarge (LAFP.PA) Price Chart

N €154 N €91 N €73 N €47

N €125 N €139 N €150 N €105 N €80 N €50

N €117 N €127 N €142 N €157 N €153 N €88 N €46

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (€)

Price Target (€)

10-Nov-06 N 95.22 117.00 28-Dec-06 N 98.95 125.00 03-May-07 N 105.56 127.00 22-Jun-07 N 114.24 139.00 08-Nov-07 N 94.99 142.00 10-Dec-07 N 105.77 150.00 08-Jan-08 N 99.95 154.00 14-Feb-08 N 96.87 157.00 01-Aug-08 N 76.28 153.00 10-Sep-08 N 72.85 105.00 15-Oct-08 N 56.85 91.00 08-Dec-08 N 37.71 88.00 09-Jan-09 N 43.30 80.00 23-Feb-09 N 30.20 73.00 01-Apr-09 N 29.44 46.00 22-Apr-09 N 37.25 50.00 16-Jul-09 N 45.88 47.00

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Saint-Gobain (SGOB.PA) Price Chart

N €92 OW €60 OW €56 OW €37

OW €92 OW €88 OW €83 OW €58 OW €39

OW €84 OW €89 N €90 N €88 OW €85 OW €59 OW €47 OW €36

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Feb 23, 2006 - May 16, 2006. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (€)

Price Target (€)

26-Jan-07 OW 62.91 84.00 23-Jul-07 OW 75.57 89.00 27-Jul-07 OW 72.92 92.00 16-Aug-07 N 73.04 92.00 15-Oct-07 N 65.96 90.00 25-Jan-08 N 50.57 88.00 21-Feb-08 OW 47.18 88.00 10-Jul-08 OW 33.72 85.00 25-Jul-08 OW 33.32 83.00 10-Sep-08 OW 37.26 60.00 23-Oct-08 OW 23.78 59.00 09-Jan-09 OW 31.65 58.00 27-Jan-09 OW 25.25 56.00 20-Feb-09 OW 25.43 47.00 22-Apr-09 OW 25.52 39.00 28-May-09 OW 27.15 37.00 16-Jul-09 OW 23.89 36.00

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USG Corporation (USG) Price Chart

N $10.5

N $9.5

UW N N $8

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Mar 26, 2007. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price ($)

Price Target ($)

26-Mar-07 UW 49.61 - 08-Sep-08 N 27.64 - 29-Jan-09 N 7.98 8.00 21-Apr-09 N 9.53 9.50 23-Jul-09 N 12.09 10.50

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Mike Betts: Buzzi Unicem (BZU.MI), CRH Plc (CRH.I), Cemex (CX), Ciments Francais (CMFP.PA), Eagle Materials (EXP), Holcim Ltd (HOLN.VX), Italcementi (ITAI.MI), Lafarge (LAFP.PA), Martin Marietta Materials (MLM), Saint-Gobain (SGOB.PA), Titan Cement Company SA (TTNr.AT), Vulcan Materials (VMC)

J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2009

Overweight (buy)

Neutral (hold)

Underweight (sell)

JPM Global Equity Research Coverage 36% 46% 18% IB clients* 55% 56% 42% JPMSI Equity Research Coverage 36% 52% 12% IB clients* 77% 72% 60%

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

http://www.morganmarkets.com/

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Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for persons licensed by or registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider for derivative warrants issued by J.P. Morgan International Derivatives Ltd and listed on The Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk/prod/dw/Lp.htm. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the

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commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised January 30, 2009.

Copyright 2009 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.

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