Portland Cement Association Cement Outlook Ed Sullivan, SVP & Chief Economist March 2017 I Rosemont, Illinois

Portland Cement Consumption Thousand Metric Tons =

Key Macroeconomic Assessments PCA’s forecast outlook reflects a mild boom-bust scenario. Fiscal policy initiatives heighten inflationary pressures and result in financial market reactions and Federal Reserve policy reactions. Key assessments: Fiscal policy initiatives. Employment and unemployment rate impacts. Cost push and demand pull impacts on inflation and inflationary expectations. Federal Reserve monetary policy countercyclical actions.

Key Macroeconomic Changes Trump’s infrastructure program is pushed back one year from fiscal 2019 to fiscal 2020. This slows down near term economic growth, softens the boom and delays a milder bust program. The pace of Federal Reserve interest rate hikes, compared to previous forecast, are slower. This coupled with softer increases in inflationary expectations, lowers the overall interest rate structure compared to the previous forecast. Construction of “The Wall” is now incorporated into forecast projections.

Labor Markets Net Job Creation Monthly Gain Unemployment Rate U3 Measurement

Interest Rates Interest Rates Annual % Inflation Rate CPUI, Annual % Change BAA Bond Rate Conventional Mortgage Rate

a Election Impact on Economic Growth Momentum: Uncertainty & Expectations Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Economic Performance Post Election: Real GDP

Fall Forecast: Economic Performance Post Election: Real GDP 50 Basis point reduction in 2017 GDP growth rate.

But… Instead of Eroding… It may add to GDP Growth Conference Board: Consumer Confidence Index: 2010=100 University of Michigan: Consumer Sentiment Index: 2010=100

But… Instead of Eroding… It may add to GDP Growth NFIB: Small Business Sentiment Index: 2010=100 NAHB Housing Market Diffusion Index Spring Forecast: 2.4% in 2017. -Confidence adds strength to GDP growth rate. - Models suggest 1.2% 1st Q growth.

Trump Policy Initiatives Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Fall Forecast: Trump Policies Most Likely Least Likely Infrastructure Investment (L 1, 2018) Reduce Regulations (EO) Obamacare Revision (L) Tax Reform (L 1, 2019) Immigration Reform (EO) Illegal Immigration (L) Building the Wall (L 1) Trade Reform (L)

Spring Forecast: Trump Policies Most Likely Least Likely Infrastructure Investment (L 1, 2019) Reduce Regulations (EO) Obamacare Revision (L) Tax Reform (L 1, 2019) Immigration Reform (EO) Building the Wall (L 1, 2018) Illegal Immigration (L) Trade Reform (L)

Tax Reform a Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Trump Tax Policies Impact on Cement Consumption Stronger Economic Growth Construction Spending Accounts for Roughly 6% of GDP Incremental Tonnage Gains 2017: 0 2018: 0 2019: 70K MT 2020: 410K MT 2021: 980K MT Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to growth initially in Q1 2019, and increases to 110 BP by Q4 of 2021. Apply General Cement Intensity Citizen Justice Tax Foundation Tax Policy Center Cement Consumption Increases

Tax Policy: Revenue Shortfall Trump Face Value, Billion $ Tax Reform may not be neutral and sets the stage for discussion of infrastructure spending. Direct Tax Shortfall Shortfall After Economic Expansion

Federal Debt Billion Nominal Dollars Federal Debt is now at nearly $20 trillion. Since the Budget Control Act of 2011, the average annual growth rate of debt increased 31.2% at an average annual growth rate of 14.1% =

Federal Debt as a Percentage of GDP Billion Nominal Dollars As long as GDP grows, the day of reckoning is postponed. A recession could magnify economic troubles. =

Trump Infrastructure Initiatives Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Fall: Infrastructure Timing: Nothing Soon One Month Six Months One Year Eighteen Months House & Senate Passage 1-9 Months Federal & State Paperwork 4-12 Months Bid Letting & Review 6-15 Months Contract Award to Construction 11-22 Months Average Construction Start: 15 Months or Mid-2018

Spring: Infrastructure Timing: Nothing Soon And now…Based on PCA D.C. assessment may be delayed one year. One Month Six Months One Year Eighteen Months House & Senate Passage 1-9 Months Federal & State Paperwork 4-12 Months Bid Letting & Review 6-15 Months Contract Award to Construction 11-22 Months Average Construction Start: 15 Months or Mid-2019

Infrastructure Size of Program Billion $, Stated As Five Year Spending With the push-back in the timing of the infrastructure bill to 2019 to coincide with tax reform measures – federal debt issues take center stage and reduce the size of the infrastructure program to Clinton program of $230 billion, or $46 billion annually. =

Trump Infrastructure :Time Distribution Year 1 : 21% Year 2: 43% Year 3: 22% Year 4: 14%

S&L Sterilization Changes in Spending, Mil $ 88% State & Local Sterilization Assumption 20%

Trump Infrastructure Spending Scenario Safe Water Harbor, Dams & Levees Electric Grid Rail Airports Public Transit

Trump Infrastructure Cement Distribution Safe Water Harbor, Dams & Levees Electric Grid Rail Airports 2017: 0 2018: 0 2019: 1.8 MMT 2020: 5.3 MMT 2021: 7.1 MMT Public Transit

Immigration Reform a Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Trump Immigration Policies Fall Forecast: Trump Immigration Policies More Likely Least Likely Mass Deportations Building the Wall Immigration Pause (EO) E-Verify & Employment Policies (EO) Hiring Customs Officers (EO) Penalizing Sanctuary Cities (EO)

Trump Immigration Policies Spring Forecast: Trump Immigration Policies More Likely Least Likely Fall forecast only addresses immigration policy impact on labor supply. Spring forecast includes impact on cement consumption attributed to building the wall. And … recognizes there are possibly significant adverse impact on consumption…but not addressed in this forecast. Mass Deportations Immigration Pause (EO) E-Verify & Employment Policies (EO) Hiring Customs Officers (EO) Penalizing Sanctuary Cities (EO) Building the Wall

a Immigration Scenario Based on Center for Immigration Studies, past peak deportations were roughly 400,000 and 5,000 customs agents were deployed. That translates into 80 annual deportations per agent. Greater powers could imply higher deportations per agent. Trump hires 10,000 additional agents. At 80 deportations per agent, that implies a potential of 1.2 million deportations. 46% of deportees return within one year. That leaves a net decline of roughly 650,000 annually. This is supplemented with voluntary departures of roughly 500,000 annually. 60% of which return in one year. That leaves a net total decline in illegal immigrants of 850,000 annually.

“The Wall”: Cement Consumption

Market & Policy Response Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

a Marketplace Reaction Financial markets react first as inflation expectations get baked into long interest rates. The yield curve steepens. Risk premiums on loans begin to edge up. Pressure on wages increases as unemployment is pushed lower. Nonlinear relationship. Wages increase faster given a 100 basis point decline in unemployment when rates are at 4%, than when they are at 5%.

Marketplace Reaction With wage increases, labor force expands. Business invests in labor saving machinery – results in a tripling in labor productivity by 2021 (If not, wages rise further). This investment will occur during a period of monetary policy tightening (high and rising interest rates). Some jobs are foregone to detriment of GDP growth.

Policy Reaction: Federal Reserve Actions The Federal Reserve plans for steady, small and increases in the federal funds rate. These increases are expected to take place as the Federal Reserve reduces financial assets acquired during its Quantitative Easing policies. The target rate for the Federal Funds Rate is 3.0% to 3.9% in 2020. This projection does not include monetary policy reactions to large fiscal policy initiatives proposed by the Trump Administration.

Intensities a Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Composition of Cement Consumption Thousand Metric Tons Recovery has added 25.4 million metric tons to annual consumption. 46% of the gain is attributed to gains in cement intensity. Intensity Gains = Construction Gains

Composition of Intensity Changes 2009-2016 4.1 Point Increase Annually Composition of Construction SCM Usage Relative Price & Other 2.2 Point Draw Annually

SCM Intensity SCM Consumption per Million Real $ 15% Total Cementious Material 22% Total Cementious Material =

Composition of Cement Consumption Thousand Metric Tons Intensity Gains = Construction Gains

Conclusion a Presentation Summary of Results Comparative Life Cycle Analysis Research Building Materials Single Family, Multi Family, and Commercial Structures Done By MIT Concrete Sustainability HUB

Portland Cement Consumption Thousand Metric Tons =

Cement Imports Thousand Metric Tons 2021: 22.4% 2016: 14.4% = Percentages are Imports Market Share

Capacity Utilization Rate Percent of Effective Capacity 2021: 82% = 2011: 62%

Portland Cement Association Cement Outlook Ed Sullivan, SVP & Chief Economist March 2017 I Rosemont, Illinois