Cement Outlook Ed Sullivan, Chief Economist PCA IEEE May 2011 Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Portland Cement Consumption: Spring Thousand Metric Tons

Net Capacity Expansion Thousand Metric Tons The Recession has resulted in commissioning delays and potentially cancelation of expansions

Cumulative Market Imbalances Million Metric Tons

Cement Capacity Utilization Percent Capacity Utilized

Introduction: Overview  Short Term Outlook:  Cyclical Economic  Cyclical Construction Sector Performance  Market Imbalances, Correction Process Medium Term Outlook:  What the recovery looks like.  Long Term Outlook:  Demographics  Long Term Growth, Per Capita Assessments  Regulatory Impacts

Economic Outlook

Sub-Prime/Exotics Lending Standards Energy Labor Markets State Deficits Economic Adversity Abates 2011/12 The Abatement of the Conditions that Put Us In recession…Recede More Slowly in the Context of Slower Job Creation 2011

Synchronized Recovery Theory Incremental Demand Gains Job Gains Sentiment Gains Lending Standards Ease & Hiring Accelerates Heals Structural Restraints In the context of moderating productivity Gains Leads to: Sentiment includes Consumer, Business & Banks: Defaults & perceived lending risks decline Job creation determines how quickly the recovery cycle spins.

Net Job Gains: Fall Forecast Vs Actual Thousand Net New Jobs Actual Fall Projection

Oil Price Impact on Economic Activity Consumer Spending Growth Rate Real GDP Growth Rate $114 $116 $108

Housing Recovery

Ingredients for a Starts Recovery Inventory no higher than 5 months supply Price stability Carry costs erode expected ROI. Weaker the price environment…lowers the months’ supply trigger point. Homebuilders Expected ROI

Foreclosures Accelerate Foreclosure Impacts Add to Inventory Depress Prices 3.2 Million Foreclosures in Million Bank possessions. Depressed Home Builder ROI Adds supply. Bank owned properties discounted. Pressures new home prices. Longer carry costs. Lower revenues. Erodes expected ROI. Delays recovery in starts.

Residential: Re-Set Scenario $ Billion Subprime Resets Alt-A Option Adjustable

Months’ Supply: Single Family Number of months required to burn off existing inventory at current selling rates

Residential Cement Consumption: Spring Thousand Metric Tons

Nonresidential Drag

Nonresidential Conclusions No longer a significant drag on construction activity. Large imbalances exist in before a positive NOI materializes  Slow job growth implies slow healing process Credit environment hostile. Conditions for positive ROI years off. Not a significant contributor to cement consumption growth until 2013

Office Buildings: Recovery Process New Office Hiring Vacancy Rates Decline Leasing Rates Stabilize Credit Troubles Ease Asset Prices Firm 1/5 of all jobs in the office. After reaching threshold of roughly 14% vacancy rate Defaults & perceived lending risks decline Leads to a recovery in office construction.

32.0 Million Office Jobs Equates to Full Occupancy 27.5 Million Office Jobs Equates to Stable Leasing Rates 27.0 Million Office Jobs Today 500,000 Office Jobs must be created before leasing rates stabilize Implying….. Since 1 in 5 Jobs Are In The Office This equates to a total job creation number of roughly 2.5 million Jobs This condition may not materialize until late 2011 Office Buildings Recovery Timing

Nonresidential Cement Consumption: Spring Thousand Metric Tons

Public Recovery

State Deficits $ Real National Estimates: States Do Not Heal in a Synchronized Fashion

Discretionary State Highway Cement Consumption Thousand Metric Tons

ARRA Spending Composition Assumptions Billion $ Resurfacing Widening & New Route Bridge Chart Excludes “Other” Spending Cement Consumption 583,000 MT Cement Consumption 2,310,000 MT Cement Consumption 2,951,000 MT Cement Consumption 214,000 MT

Roadway Cement Consumption Outlook Thousand Metric Tons SAFETEA-LU/ Highway Bill State & Local

Beyond the Crisis

Economic Outlook: Medium Term Turbulence Unintended Consequences: Past policies have a payback.  Fiscal/Monetary Inflation takes hold as capacity excesses are diminished.  Weak dollar sustained  Global Synchronized Growth: Commodity prices rise. Improves concrete’s competitive position. Interest rates rise.  Inflation premiums, weaker dollar, high foreign ownership of debt Taxes Rise  Deficits must be paid for and in context of weaker dollar.

Interest Rate Outlook Interest Rates Mortgage Rate, Conventional 30

 American consumer, the engine of US economic growth  May distance from debt spending patterns (lowering GDP).  Baby boomers may not re-capture wealth  Higher inflation erodes spending.  Debt  Stimulus spending must be paid.  resulting in either higher interest rates, higher taxes, and potentially higher inflation – or all three  High debt in context of weak dollar, heightens issue  Fiscal austerity?  Impacts  Slower growth – Is 50 basis point enough? After the Crisis: “New Normal”: Economics

 Not a typical recession recovery.  Amplified by structural corrections.  Amplified by possible policy errors.  Long impacts  Pent-Up Demand  Being generated across all sectors.  Longer period of distress, more pent-up demand  Timing and magnitude of release impacted by economy.  Regional impacts from resulting growth.  Residential, nonresidential & public synchronized – 2013 & Beyond.  Typically suggests strong cement consumption growth rates. After the Crisis: “New Normal”: Construction

Real Construction Spending Billion Real $1996

US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Demographics: Population Adds 65 Million Persons Adds 9.1 Million School-Age Persons Education Construction Adds 34 Million Retirement Age Persons Medical Adds 31 Million Households Housing, Retail & Infrastructure

Competitive Position “New Normal” or “New Headaches”

Emerging economies, led by China/India, account for key growth drivers. Accounts for larger share of world GDP than OECD by 2014 (IMF). Exerts “new” potent demand on world markets “Synchronized” world growth returns Commodity prices (oil), freight rates, trading patterns subject to change. Impacts concrete competitiveness (oil prices = paving position, residential ICF) Impacts sourcing decisions – high freight rates raising import costs. New challenges could lead to potentially new economic/political tensions. After the Crisis: “New Normal”: Global

Concrete’s Relative Price Position Improvement Based On: - Rising Oil Prices - Coker Investment Significant Improvement Based On: - China’s Economic Growth Modest Improvement Based On: - Housing Recovery - Chinese Demand -Mountain Pine Beetle Very Modest

Concrete’s Relative Price Position Vs Asphalt Improvement Based On: - Rising Oil Prices - Coker Investment Significant Competitive Price Gains for Concrete. Even After Considering EPA Compliance Costs Size of the Concrete- Asphalt Competitive Arena: Huge

Announced New Coker Installations Cumulative: Thousands of Barrels Per Day Coker Capacity Increases Five Fold – Lowering Oil Price Parity Threshold

While Government can be slow to react, the Market Mechanism eventually effects its decision making process. Focus on federal & state deficit reduction. Restructure of entitlement programs politically toxic. Focus shifts on spending efficiency. State Spending on transportation accounts for $120 billion annually. Structural factors in state DOT material selection process inhibit free market decisions regarding the lowest cost (initial bid and life cycle) from being realized.  Escalators, Alternative Bid, equivalent design Inhibitors cost states billions annually – to the detriment of other spending priorities. After the Crisis: “New Normal ”: Material Selection Process

Concrete’s Relative Price Position Vs Steel Improvement Based On: - Synchronized World Growth - China’s Strength Moderate Competitive Price Gains for Concrete. Even After Considering EPA Compliance Costs Size of the Concrete-Steel Competitive Arena: Moderate

Concrete’s Relative Price Position Vs Wood Improvement Based On: - Housing Recovery - Chinese demand increases in face of Russian tariffs. - Pine Mountain Beetle epidemic Very Modest Competitive Price Gains for Concrete. Size of the Concrete-Wood Competitive Arena: Large

Concrete’s competitiveness in the North American marketplace will be increasingly impacted by international demand conditions – particularly China. PCA expects sustained Chinese growth and synchronized world growth materializes 2013 and beyond. Concrete’s relative price position improves across all material segments in this global economic context. If, synchronized growth fails to materialize, or China’s growth subsides, concrete’s competitive position declines – perhaps significantly. Demand for other commodities declines – prompting pricing adjustments in among North American material competitors (steel, asphalt, wood). China could vent excess capacity – depressing steel prices. Competitive Position and Potential Market Share Gains are Linked to Global Economics

Cement Consumption: Long Term Million Metric Tons Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution.

Regulatory Environment

 Activist EPA  Plant shut downs  High compliance costs.  New Source regulations!  Resumption of demand growth  Import Dependence Grows  In context of weak dollar  In context of emerging economy demand growth  Higher freight rates.  Sourcing strategies  Near term, import dependence – longer term? After the Crisis: “New Normal”: Regulation

NESHAP : 2013  Limits emissions of Hg, HCL, PM, THC  To comply: $3.2 billion  Capital & operating cost addition: $17  Plant shut downs & Capacity shut downs

U.S. Supply Balance: EPA NESHAP Million Metric Tons Cement Consumption Imports: 54 MMT Cement Production EPA: NESHAP Impact

CISWI : 2015  Targets only plants that burn alternative fuels  Limits emissions of 9 air pollutants  Roughly 49 MMT of capacity impacted  To comply: $2 billion, or stop burn  Capital & operating cost addition: $21

New Source Regulations  NESHAP, CISWI, NSPS, NAAQS, Tailoring Rule  EPA policies NOT static – They are DYNAMIC and become more rigorous with time.  Age composition of Kilns suggest 35 plants must modernize to remain world class competitive by 2030  Prevent New Source standards by non-investment – ultimate closure of an additional 3.4 MMT

Capacity Age Distribution Percent of Total Capacity (2008) Wet = 13.7 MMT Dry = 83.7 MMT NESHAP & CISWI: Standards for Existing. Regulation becomes more rigid for “new sources”

Fly Ash: Hazardous Waste  Comment Stage: Two Options – Same Result  Litigation Threat – Reduces/Eliminates Use  Utilities – Landfill and bury costs into rate base: No Ash  Replace fly ash use in concrete mixes with cement  Increase CO2 worldwide

Fly Ash Consumption by Concrete & Cement Thousand Metric Tons Concrete Add: Blue

Closing the Supply Gap 100 MMT + = 2030 Gap MMT Import Capacity Two Options: Foreign Source: Add Import Terminals Domestic Source: Add 50 Plants (2 MMT per Plant)

Investment Scheme Pre-Regulation US Investment Multinational Investment $ Investment in Other Countries Expansion Modernization

Investment Scheme Post-Regulation US Investment Multinational Investment $ Higher Relative ROI Investment in Other Countries Expansion Modernization Compliance

Before Settling On Import Sourcing Strategy…. - $ Per Barrel, WTI (estimated), Dry Bulk Freight Rates Synchronized World Growth: Characterized by Emerging Middle Class in Developing Economies

Cement Outlook Ed Sullivan, Chief Economist PCA IEEE May 2011 Named Most Accurate Forecaster By Chicago Federal Reserve, 2009