Ed Sullivan, Chief Economist PCA Cement Outlook: 2008 Ed Sullivan, Chief Economist PCA 240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, write downs are threatening some banks solvency,, oil prices are above $120 per barrell, $4 gas is coming….and yet….

Introduction: Overview The economy is in recession…and it may not be mild. December beginning Fiscal & Policy actions will not avert a recession. Timing lags Fiscal Policy not have as strong an impact on GDP as expected. Debt, Energy, Adverse Momentum. Lending aversion toward risk is spreading Mortgage here Consumer and Commercial impacts begins to emerge. Job losses compound economic adversities. 240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, write downs are threatening some banks solvency, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, oil prices are above $120 per barrell, $4 gas is coming….and yet….

Key Questions How deep will retrenchment go ? How long will it last ?

Portland Cement Consumption Declines Continue Through 2009. = Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) (On a Percentage Basis: Equal to 1980-82 Recession)

Capacity Expansion Thousand Metric Tons Stated Capacity Expansions Potential Increases From Specification Changes

Conclusion Double-digit decline in consumption with trough in 2009. Large capacity increases magnify potential market imbalances. Imports record large, sustained declines. Global conditions suggest high freight rates continue. 2008: Bears most of the burden of correcting market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009. Days Supply Inventory remains above historical average. Most pressure materialize in 2009. Past Peak (2005) not realized until 2014

Recession is Here, and its not going to be Mild Economic Outlook Recession is Here, and its not going to be Mild

Introduction To determine the cause of a slowdown in economic Growth, or even a recession …. …. Look no further than the excesses and imbalances created during the preceding boom period. Debt played important role in 2003-2006 growth. Responsible debt? Easy terms & standards Unprecedented link in consumer spending to housing wealth. Payback is tough – maybe more than consensus of economists believe.

Sub-Prime Mortgage Resets Total Loans Scheduled for Reset Period of Emerging Trouble

Recession: Construction Declines May not be Short or Shallow. 2006 Foreign Capital Inflows 2007 Housing 2008 Consumer 2009 Commercial Public Energy

Monetary Policy Timing Lags Percent Change, GDP Growth Rate, Inflation Change in Real GDP Growth Rate Change in CPIU Inflation Rate Peak Economic Stimulus Occurs 8-9 Months After Cut

Fiscal Policy Impacts Per Month Percent Change, GDP Growth Rate Tax Rebate Planned Impact Tax Rebate Impact With PCA Debt Reduction Assessment

Unleaded Gasoline Prices Cents Per Gallon, Department of Energy At $4.10 Per Gallon, Wipes Out $170 Billion Fiscal Stimulus. Every 10 Cent Increase at the Pump Takes $15 Billion Out of Consumer’s Pockets on an Annualized Basis Since January 1st, Gasoline Prices have increased 35 cents = Equating to a $50 Billion Annualized Draw on Consumer Spending.

Net Job Creation Monthly Change in Total Non-Farm Employment, BLS Economy has Shed 240,000 Jobs in Last Three Months…AND…The Recession has Just Begun.

Economic Growth Outlook Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” over in 3rd Quarter – Distress Continues Into 2009.

Residential Outlook Recovery Delayed

Home Inventory Thousands of Homes for Sale, December New New New New New New Existing Existing Existing Existing Existing Existing Existing Homes Account for 87% of Total Home Inventory

Single Family Price Trend: Existing Homes Compared to Year Ago Levels Percent Change, Year Ago (%) Projected High Inventories Will Depress Prices Throughout 2008.

Lenders Reporting Tighter Lending Standards: Mortgages Percent Reporting Tighter Lending Standards Tighter Credit Will Undermine Sales Recovery Easy Credit Period = Sub-Prime Lending Has disappeared.

Nonresidential Outlook Declines in 2008 and 2009

Nonresidential Construction Nonresidential 2006-2007 Strength Strong Expected ROI Fostered by Strong Economic Growth Pent-up Demand Easy Credit Conditions Nonresidential 2008-2009 Softening Expected ROI Softens With Overall Economic Slowdown Credit Conditions Tighten Risks and Uncertainty Grow

Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards Medium to Large Firms Easy Credit Period = Small Firms Sub-Prime Has Spilled into Commercial Credit Markets

Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes =

Slower Growth in 2008, Problems Looming Ahead Public Outlook Slower Growth in 2008, Problems Looming Ahead

States With Projected Budget Shortfalls District of Columbia 2009 Shortfall 2010 Shortfall No Shortfall

Correction is Temporary Conclusion Correction is Temporary

Market Imbalances - Changes in Cement Consumption Tons + Capacity Expansion Tons = 1980-82 1990-91 2000-01 2007-2008 1973-74

Freight Rate Trends $ Per Metric Ton HANDYMAX 40-50,000 DWT South East Asia U.S. Gulf HANDYSIZE 28-40,000 DWT Transatlantic U.S. East Coast/U.S. Gulf

Market Imbalances: After Import Reductions - Changes in Cement Consumption Tons + Capacity Expansion Tons = 1980-82 1990-91 2000-01 2009 ! 1973-74

Conclusion Double-digit decline in consumption with trough in 2009. Large capacity increases magnify potential market imbalances. Imports record large, sustained declines. Global conditions suggest high freight rates continue. 2008: Bears most of the burden of correcting market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009. Days Supply Inventory remains above historical average. Most pressure materialize in 2009. Past Peak (2005) not realized until 2014

Take a Step Back Longer Term Outlook

Take a Step Back Cyclical correction is temporary.

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

Share of U.S. Population Growth 2006-2030 (Percent Share of Total) Note: Total U.S. Population Growth: 65 Million Persons 47% of Total Population Growth Occurs in California, Texas and Florida 0% to 1% Share 10% + 3% to 10% 1% to 3% Source: U.S. Bureau of Census

Demographics: 2007-2030 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

Highway Lane Miles Thousands of Miles Just to Maintain Current Highway Congestion Levels, Federally Aided Highways Must Expand Nearly 25% by 2030 . Given 49 Million Additional Licensed Drivers.

Lane Miles per 1,000 Licensed Drivers 2007 Road Congestion Lane Miles per 1,000 Licensed Drivers Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic ≤ 30 mls/1000 31 - 50 mls/1000 51 - 70 mls/1000 71 – 90 mls/1000 ≥ 90 mls/1000

Lane Miles per 1,000 Licensed Drivers 2030 Road Congestion Lane Miles per 1,000 Licensed Drivers Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic ≤ 30 mls/1000 31 - 50 mls/1000 51 - 70 mls/1000 71 – 90 mls/1000 ≥ 90 mls/1000

Medicaid Pressures Build Billions of $ Blue/Solid: Total Medicaid Spending Red/Striped: State Medicaid Spending 34% 30% 21.5% of Total State Expenditures 25% 2032: State Medicaid Spending Exceeds One Trillion $

Will Medicaid “Crowd Out” Highway Spending? Billions of Real State Spending Targeting Transportation Transportation Spending: Constant 8% Share of Budget Transportation Spending: Share Reduced to 7% of Budget Transportation Spending: Share Reduced to 5% of Budget Gasoline Tax Increases Must Be Viewed in the Context of Future Fiscal Pressures Facing States

Per Home, Lifetime C02 Savings ICF Home Over Frame Co2 Metric Tons, Per Home Total Heating & Cooling C02 Saving: 92 Tons per Home Additional C02 Emitted by Cement Production Conservatively Assumes 50 Year Life of Home

ICF & Related Systems: CO2 Savings Metric Tons of CO2 Gains Achieved Though Energy Savings In Space Heating & Cooling 30% 25% 10% of Total Housing Starts 20% 2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

Potential “Green” Gains: ICF & Related Systems Incremental Gains in Cement Consumption, Metric Tons 30% 25% 20% 10% of Total Housing Starts 2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

Cement Consumption: Long Term Million Metric Tons

Longer Term Decisions: No New Plants Feeding the Beast Longer Term Decisions: No New Plants

U.S. Supply Balance: No New Capacity Expansion Plans Million Metric Tons Cement Consumption Imports Clinker Production Assumes No New Capacity: 2013-2030

U.S. Cement Imports: No New Capacity Expansion Plans Million Metric Tons 2030: 84 US Domestic Capacity Expansion New Capacity Requires Increased Import Supplement 2013

U.S. Supply Balance: Constant Import Share Scenario Million Metric Tons Cement Consumption Clinker Production

Supply Challenges: 2008-2030 Import Strategy? 84 MMT. Equates to 4 new terminals every year from 2016-2030. Further Capacity Expansion? Domestic production reaches 142 MMT Equates to one new 2 MMT plant every year from 2015-2030. Must weight the risks of uncertain global market conditions and high freight rates VS Increased compliance costs associated with Climate Change laws.

Longer Term Decisions: Climate Change Considerations Feeding the Beast Longer Term Decisions: Climate Change Considerations

Climate Change: S.2191 Establishes emission cap of 5775 MMT of CO2 by 2012 for covered sectors Roughly 6000 MMT of CO2 currently – 3.8% reduction Declines to 1732 MMT of CO2 by 2050 70% Reduction over program period. Severe declines materialize after 2025. Free Market Cap & Trade Mechanism Initial Stages: Many suppliers of allowances & relatively few demanders. CO2 Credit Allowance (Carbon Cost) – relatively cheap Later Stages: Tighter Caps More industries struggle to meet cap – implies fewer suppliers of allowances and more demanders. CO2 Credit Allowance – relatively expensive. 84 MMT. Equates to 4 new terminals every year from 2016-2030. Further Capacity Expansion? Domestic production reaches 142 MMT Equates to one new 2 MMT plant every year from 2015-2030. Must weight the risks of uncertain global market conditions and high freight rates VS Increased compliance costs associated with Climate Change laws.

Climate Change: S.2191 Carbon allowance price rises from as low as $36 per ton of CO2 in 2012 to $271 per ton of CO2 in 2030. Cement industry pays this “tax” for every ton produced over its CO2 allotment. Higher Carbon Costs result 4 million fewer jobs by 2030. Gasoline prices near $6 per gallon by 2030. Industrial electricity increases from roughly 6 cents per KWH to 19 cents per KWH. Natural gas increases from $6 per Metric Cubic Foot to $26 per Metric Cubic Foot Economy will be weaker in context of higher costs

Climate Change: S.2191 Where are you going to achieve such large cuts in emissions? Residential: = 6% Commercial = 3% Industrial = 16% Transportation = 33% Electricity = 42% Burden falls on Transportation and Electricity Can implementation of new carbon savings technology for electricity meet these challenges according to time schedule laid out by S.2191? If not, switch to lower carbon fuels: Natural Gas Transportation: What happens to Highway Trust Fund?

Ed Sullivan, Chief Economist PCA Cement Outlook: 2008 Ed Sullivan, Chief Economist PCA 240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, write downs are threatening some banks solvency,, oil prices are above $120 per barrell, $4 gas is coming….and yet….