Ed Sullivan, Chief Economist PCA Cement Outlook: 2009-2014 PCA Fall Board Meeting October 2009 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Introduction Overview

Introduction: Overview Economic fundamentals are improving. Conditions remain weak. Recovery will be gradual Strong-Moderate Growth still a year away. Private Sector no longer drives demand Residential & Nonresidential recoveries are not expected to materialize anytime soon. Recoveries: Residential 2011, Nonresidential 2012 Outlook shaped by policy actions. State fiscal conditions sterilize ARRA impacts ARRA reveals bureaucratic delays Tilts impact even more so to 2010-2011

Portland Cement Consumption Thousand Metric Tons Growth Rates 2007: - 9.6 2008: - 15.1 2009: - 26.3 2010: + 5.2 2011: + 16.5 2012: + 14.5 2013: + 11.5 2014: + 8.6 - 54 MMT =

Capacity Expansion: Delays Thousand Metric Tons Stated Capacity Expansions: Fall 2009 Stated Capacity Expansions: Fall 2008

Introduction: Conclusions Stimulus will provide some relief beginning in 2010…. …but hardship facing the industry will not be avoided… Utilization rates do not top 80% until 2012.

Fall Forecast Adjustments Downward Adjustments, Upside Risks

Bottom Line: Forecast Assessments Macroeconomic forecast has performed extremely well. Construction forecast has performed very well. Cement forecast has consistently under estimated depth of decline. How can this be? Intensity declines PCA forecasted worst decline in intensity in history. Double the decline experienced during 1980-1984 incorporated into forecast. It should have been triple the decline.

Peak-to-Trough Decline in Intensity: U.S. Cement Intensities (MT / Million Real 1996$ Construction Spending PIP) Peak-to-Trough Decline in Intensity: 1980-1985: -13.1 1990-1991: -1.8 2000-2001: -1.7 Summer Forecast: -26.1 Fall Forecast: -34.7

Bottom Line: 2009 Forecast Adjustments Summer Forecast Fall Forecast Weak Economy Real GDP = -3% Job Loss = 4.5 million Construction Spending - 15.5% ARRA delayed but some impact in 3rd/4th quarters. Large declines in nonresidential - 14.5% Residential bottoms Cement Intensity - 6.9% Cement Consumption: -22.0% Weak Economy Real GDP = -2.7% Job Loss = 4.6 million Construction Spending - 16.5% ARRA delayed and little impact in 3rd/4th quarters. Larger declines in nonresidential - 18.5% Residential bottoms Cement Intensity - 11.6% Cement Consumption: -26.6

Bottom Line: 2010 Forecast Adjustments Summer Forecast Fall Forecast Tepid Economic Recovery Real GDP = +1.3% Job Creation = 648K Construction Spending + 0.1% ARRA impacts materialize. State and Local offsets bottomed Large declines in nonresidential - 22.5% Residential marginal recovery Cement Intensity Recovers + 10.6% Cement Consumption: +10.9% Tepid Economic Recovery Real GDP = +2.1% Job Creation = 543K Construction Spending - 2.9% ARRA impacts materialize. Further State & Local offsets Large declines in nonresidential - 22.4% Residential marginal recovery Cement Intensity Recovers + 8.3% Cement Consumption: +5.0%

Bottom Line: Forecast Risks Unlike each of the forecasts of the past four years, the forecast contains upside risks. ARRA funding is in place. Timing of its release is issue. Attitude of “I haven’t seen it yet” leads to incorrect conclusion “It won’t have any impact in 2010-11” Low cement intensities associated with high resurfacing share of ARRA spending are assumed. Discretionary state spending will not sterilize ARRA impacts completely. Discretionary highway spending has accounted for roughly 10-13 MMT decline in cement volume since 2007. Has potential sterilization impact run its course? Intensity will rebound adding to cement volume. Timing issue for out years of the forecast. Existence of Pent-up demand?

The recession is over…BUT…not for you Economic Outlook The recession is over…BUT…not for you

Economic Adversity Abates Mid-2010 2006 2007 2008 2009 2010 Sub-Prime Energy Financial Crisis Labor Markets State Deficits

Critical Conditions Required for Sustained Strong Economic Growth Labor market recovery, ease in lending standards

The turning point for private construction activity is largely determined by the timing and magnitude of Job growth. Labor markets are improving at a gradual pace. Roughly in-line with PCA expectations. Job growth returns by end of 2nd quarter 2010. After a short Saddle point . Job creation approaches 3 million in 2011 and 2012. Employment remains below pre-recession levels at end of 2012. Work hours and temp hiring precedes job growth. No evidence of this materializing. Job outlook may be ambitious.

Job Recovery: Past Recessions - Change, Thousands of Jobs Current Recession

Ease in lending standards. The turning point for private construction activity will also be determined by the timing and magnitude of an Ease in lending standards. No easing until it is clear risks in lending have diminished. THIS IS NOT A CAPITAL ISSUE, IT’S A CREDIT AND RISK ISSUE Job creation, real estate prices must stabilize before risks ease. Near term foreclosure rates accelerate. Credit easing will not be synchronized across all sectors. Residential lending risks decline first. Easing 6 months after job creation begins. Pattern of rising home prices sustained by mid-2010. Nonresidential lending risks decline second. Nonresidential write-offs accelerate through 2011. Longer time lags for recovery in nonresidential fundamentals. Nonresidential price conditions weaker.

Foreclosures have increased 110% over year ago levels. Bank Charge-Offs versus Unemployment Rate - % Loans Charged-Off, % Unemployed 10.4% March 2010 Foreclosures have increased 110% over year ago levels.

Repeat Sales Indices, 2000Q4 = 100 Commercial Real Estate Prices Real Estate Price Progression Repeat Sales Indices, 2000Q4 = 100 Home Prices Commercial Real Estate Prices

The recession is over…BUT…not for you Economic Outlook The recession is over…BUT…not for you

Economic Outlook: Consumers Sustainable, strong consumer spending growth will not materialize until labor markets recover. Job losses and high unemployment rates depress income growth. Consumer sentiment is improving from record low levels. Consumer is now saving. Economic and psychological reasons. Paradox of Thrift

Economic Outlook: Investment Declines in Residential softening Becomes a neutral contributor to growth near term Low expected ROI hinders recovery in business investment. Access to credit remains an issue. Business Investment likely to be a significant drag on economic growth for another year. Inventories will add strength….but probably less than many think

Inventory-to-Sales Ratio - Total Betting on Inventory Accumulation to Spur Near Term Growth May Be Premature.

Economic Outlook: Government ARRA spending has been slow to materialize. Large state and local deficits partially sterilize the ARRA impacts.

Economic Growth Outlook Percent Change, GDP Growth Rate

“the recession is officially over”. The fundamentals of construction activity do not begin to materialize until well after it has been declared “the recession is officially over”. Real GDP growth is at hand….marking the “end of the recession”. Inventory adjustments. Job growth must be sustained and robust for a nonresidential recovery. Turning point in vacancy rates, leasing rates and expected ROI. Job growth must be sustained and robust for a residential recovery. Forget hype over meager gains in sales pace, inventory improvement. Significant gains in cement consumption will not materialize until 2011. Private sector 2010 improvement in residential cement consumption offset by declines in nonresidential sector. Wait until 2012 before ALL fundamentals in construction are positive. Residential, nonresidential and public. UPSIDE RISK – 2012-2014

Residential Outlook Take-off Delayed

Residential Factors Sales Pace Inventory Adjustment Labor market slow to recapture jobs. Ease in lending standards slow to materialize. Bank owned properties compete with new homes. First time home buyer credits expire. Inventory Adjustment Foreclosures moratorium over. Labor market stress and resets suggest increase in foreclosure rate Shadow inventories. Trigger Point Lower. Home prices & economic distress suggest potential of lower builder trigger point for months supply.

Residential Cement Consumption Thousand Metric Tons - 29.6 MMT = 55% of Total Cement Consumption decline is attributed to residential

Nonresidential Outlook Dramatic Declines Ahead, Recovery Begins in late-2011

Nonresidential Credit Crisis Revenues down due to rising vacancies and pressure on leasing rates. Defaults increase More than 60% 5 year balloon mortgages. Many loans undertaken during peak years – 2005-06. Loans come due in 2010. More than 20% of financing via MBS. This financial instrument has disappeared.

Nonresidential Cement Consumption Thousand Metric Tons - 9.8 MMT = 18% of Total Cement Consumption decline is attributed to nonresidential

Fiscal Conditions Worsen, ARRA Impact Delayed Public Outlook Fiscal Conditions Worsen, ARRA Impact Delayed

State & Local Public Outlook Fiscal conditions will partially sterilize ARRA

FY2009 State Deficits Deficit % Share of Budget No Deficit 0-10% ME RI MA VT NH AL GA SC TN FL MS LA TX OK NM KS MN IA MO AR WY CO ND SD NE WA ID MT OR NV UT AZ CA WI IL IN MI OH KY WV VA NC MD DE PA NY CT NJ HI No Deficit 0-10% 11%-20% 21% + Source: PCA, Center on Budget and Policy Priorities, June 2009

FY2010 State Deficits Deficit % Share of Budget No Deficit 0-10% ME RI MA VT NH AL GA SC TN FL MS LA TX OK NM KS MN IA MO AR WY CO ND SD NE WA ID MT OR NV UT AZ CA WI IL IN MI OH KY WV VA NC MD DE PA NY CT NJ HI No Deficit 0-10% 11%-20% 21% + Source: PCA, Center on Budget and Policy Priorities, June 2009

Job Losses Generate Deficits –Pushing Discretionary Spending Down Discretionary State & Local Highway/Street Spending - Millions of Real $ (estimated) Job Losses Generate Deficits –Pushing Discretionary Spending Down State Discretionary Highway Spending Will Act as a Powerful Drag on Total Highway Construction Activity in 2009-2010

“Shovel Ready” Timeline Jan Feb March April May June July August House Bill Obama Inaugurated Senate Passes & Bill Signed Federal Paperwork State Paperwork Three Month Delay Bid Letting Bid Review Contractor Paperwork Construction Begins

ARRA – Weekly Highway Construction Spending - Dollars (Trend – No Seasonal Consideration) History Forecast

ARRA – Weekly Highway Construction Spending - Dollars (Trend – No Seasonal Consideration) History Forecast

New Highway Bill Assumptions Upside Risks

SAFETEA-LU versus New Highway Bill Assumptions

Highway & Street Projections

Net Change in Highway Cement Tracing the Impacts on Highway Cement Consumption Annual Change, Million Metric Tons 2009 2010 2011 2012 2013 2014 Discretionary State Spending -7.0 -0.5 0.0 +4.5 +2.0 +2.0 Federal Highway Program 0.0 0.0 +3.0 +3.0 0.0 0.0 Stimulus 0.0 +5.0 0.0 -4.5 -0.5 0.0 Competitive Paving Gains 0.0 0.0 0.0 +0.8 +0.8 +2.0 Net Change in Highway Cement -7.0 +4.5 +3.0 +3.8 +2.3 + 4.0 Total highway Cement 25.0 29.5 32.5 36.0 38.5 42.5

Public Cement Consumption Thousand Metric Tons - 14.1 MMT = 26% of Total Cement Consumption decline is attributed to public decline

Intensity Projections Upside Risks

U.S. Cement Intensities (MT / Million Real 1996$ Construction Spending PIP) Intensity Outlook 2007: 155 / -6.7 2008: 143 / -12.5 2009: 126 / -16.6 2010: 137 / +10.5 2011: 139 / +2.0 2012: 143 / +4.7 2013: 144 / +0.6 2014: 148 / +3.4 Upside Risk to Intensity Projections: New Highway Bill Timing of Nonresidential Intensities

After the Economic Crisis Medium Term Outlook

Portland Cement Consumption Thousand Metric Tons - 54 MMT =

Ed Sullivan, Chief Economist PCA Cement Outlook: 2009-2014 PCA Fall Board Meeting October 2009 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009