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 weak….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

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.

Net Job Creation: Alabama Monthly Change in Total Non-Farm Employment, BLS Alabama Created 29,100 jobs in 2007. It has Shed 5,000 Jobs in 2008. PCA Expects Alabama Will Shed 14,000 Jobs in 2008.

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.

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.

Alabama Construction Composition

Alabama: Composition of Construction Residential: 35 % Nonresidential: 18% Retail: 50% Agriculture: 20% Office: 10% Energy/Industrial/Hotel Public: 47% Highway & Streets: 45% Public Buildings: 15% Other Public: 40% 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….

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.

Alabama: Single Family Prices Single Family Median Price

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.

Alabama: Single Family Outlook Single Family Permits 23% Decline in 2007, Similar Decline in 2008. Moderate Decline 1st half 2009. Recovery 2nd half 2009.. Residential Accounts for more than 1/3 of Alabama cement consumption. The Decline anticipated for 2008 translates into 5% to 6% decline in total market volume.

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

Retail Job Creation: Alabama Monthly Change in Total Non-Farm Employment, BLS Alabama Created 6,300 retail jobs in 2007. It has Shed 1,500 Jobs in 2008.

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 Alabama Business Leaders Confidence Index has declined 23% during past year. 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

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

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

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.

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….