Ed Sullivan, Chief Economist PCA Cement Outlook Fall Committee Meetings August 2012 Ed Sullivan, Chief Economist PCA

Snapshot of the Market Cement consumption through the first half of 2012 is up 13.3% over last year. 15 consecutive months of growth. 43 states recorded first half growth over 2011 volumes. Consumption gains have been achieved in the context of sluggish economic growth. Real GDP = +1.75% during the first half of 2012. Job Creation averaged 149K per month (1.8 million annualized). Favorable weather accounts for some of these gains. . Construction activity grew 5.8% during the first half of 2012. Residential = +8.4%, Nonresidential = +14.4%, Public = -7.1%. Cement intensity averaged 160 tons per million real dollars of construction spending. First half intensity is up over 2011 levels and near 2005-2006 past peak levels.

Cement Consumption: 2012 000 Metric Tons Favorable Weather Prior to good July (168K) numbers = 876K annualized 3 month moving average

Cement Consumption: 2012 000 Metric Tons 70MMT SAAR = 5% Prior to good July (168K) numbers = 876K annualized 3 month moving average July SAAR is the lowest since September 2011

Cement Consumption: 2012 000 Metric Tons 73MMT SAAR = 7% 73MMT SAAR = Pre-weather rate + Projected Gains from Housing Starts Projected Gains from Nonresidential - Projected losses from Public Projected 10% decline in intensities 70MMT SAAR = 5% Prior to good July (168K) numbers = 876K annualized 3 month moving average

Outlook for the Market Sluggish economic growth continues through 2013, withy gradual strengthening in 2014 and beyond. Job creation is slow this year and next before accelerating. Structural issues that plague the construction market (foreclosures, high vacancies & depressed ROI, state budgets) are slow to heal. Growth, from trough levels, is meager until stronger economic conditions materialize in 2014. Cement consumption growth remains modest in volume terms and is fueled by residential, nonresidential and intensity. Public weakness is offset. By 2014, all sectors are positive and double-digit gains in consumption materialize. Sustained growth. By 2017 – 107 MMT, roughly 12% below past cyclical peak.

Portland Cement Consumption Thousand Metric Tons Summer Forecast = 2011 2012 2013 2014 2015 2016 3.0% 6.9% 5.7% 10.6% 9.0%

Contribution to Growth 2011 2012 2013 2014 2015 2016 2017 Total 2,067 4,889 4,266 8,418 9,341 8,735 5,111 Residential -1,020 2,567 2,594 4,657 4,383 3,157 1,376 - Share of Total (%) 60.8% 55.3% 46.9% 36.1% 26.9% Nonresidential 446 1,371 824 1,623 2,689 2,769 1,469 19.3% 28.8% 31.7% 28.7% Oil/Farm/Utilities 702 1,262 374 333 332 338 314 8.8% 4.0% 3.6% 3.9% 6.1% Public 1,938 -312 474 1,804 2,471 1,951 11.1% 21.4% 20.7% 28.3% 38.2%

Economic Outlook

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

Net Job Creation Annualized Net Job Creation 2.7 Million Annualized 3 month Moving Average 2.4 Million Annualized 3 month Moving Average Prior to good July (168K) numbers = 876K annualized 3 month moving average Current: 1.2 Million Annualized 3 month Moving Average At this rate December 2007 Employment Levels are not reached until April 2016

Consumer Sentiment Composite Series 2000-2007 Average = 103 Prior to good July (168K) numbers = 876K annualized 3 month moving average Current: 66 Composite

Economic Risks The economy is expected to grow sluggishly. 2% RGDP A fragile economy is vulnerable to internal or external shocks. External = Europe Internal = Fiscal Cliff

The “Fiscal Cliff” Congress passed into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”. The law extended some fiscal stimuli for two years, but required action to reduce the long-term federal debt levels. Lacking action by congress, automatic deficit reduction measures would go into effect. At the time, the law seemed very reasonable. The two year extension of fiscal stimuli, it was thought, would give congress enough time to reach a reasonable accord on the issue, and give the economy time to gain enough strength to endure the impact on growth associated with the fiscal drag of debt reduction. Unfortunately, congress has yet to act, and the economy has yet to gain enough momentum to stand strongly on the private sector’s shoulders.

The “Fiscal Cliff”: CBO Fiscal Deficit reduced from $1.17trillion in 2012 to $612 billion in 2013. Revenue Adjustments: Expiration of income & estate taxes “Bush Tax Cuts” (Dec. 31, 2012) $221 Billion Expiration of Payroll Tax Holiday (Dec. 31, 2012) $ 95 Billion Other Expiring Provisions (Dec. 31, 2012) $ 65 Billion Taxes Included in Affordable Care Act “Health Care Law” $ 18 Billion Total $ 399 Billion Spending Adjustments: Automatic Enforcement of Spending Cuts “Sequestration” $ 65 Billion Expiration of extended unemployment benefits $ 26 Billion Reduction in Medicare pay to Doctors $ 11 Billion Other reductions $ 105 Billion Total $ 207 Billion Total Revenue & Spending $606 Billion or Roughly 4% of US GDP Moody’s Calculates the revenue & s[ending cuts at $728 Billion or roughly 4.6% of US GDP

The “Fiscal Cliff”: Three Scenarios Rational Congress Avoidance Agreement Reached Before 2013 Dysfunctional Congress Partial Impact First Half of 2013 Agreement Complete Congressional Impasse Full Adverse Impact No Agreement Reached in 2013 Mild Adverse Impact: Marginally higher taxes & spending cuts. Real GDP grows near 2%. Cement Consumption: +5% Moderate Adverse Impact: Automatic provisions take affect. Agreement reached only after economic distress. Real GDP floats near zero (-0.5% to +0.5%) Cement Consumption: -10%. Severe Adverse Impact: Severe recession. Real GDP declines 2%. Cement consumption: -15%.

Alternative Real GDP Outlooks Annual Percent Change Rational Congress Dysfunctional Congress 2013 Impasse

Fiscal Cliff May Already Be Impacting the Economy Consumer Sentiment (Line) Recession Risk (Bar) 2010 2011 2012

Construction Outlook

Construction Outlook

Cement Intensity Outlook

Residential Construction

Single Family Starts Outlook

Residential Market Outlook Modest job creation hinders SF sales and household formation this year and next. Robo-signings delay foreclosure activity 1st half 2012 and leads to an acceleration in 2nd half 2012-2013. Easing in lending standards postponed. Improvement in month’s supply of inventory and home prices is mildly reversed. Damaged credit, household formation, student loan debt, improved multifamily ROI, prompt starts mix to favor multifamily construction. Housing starts show sustained increases from depressed levels. Regional growth initially favors interior of the United States. Depression of large markets eventually cured with job creation and fading of foreclosure issue - Pent-up demand released 2015-2017 leading to strong starts growth.

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

SF Home Prices Annual Y-O-Y Percent Change Median Price, National Association of Realtors Prior to good July (168K) numbers = 876K annualized 3 month moving average Standard & Poors’ Case-Shiller

Months Supply Inventory Inventory/Monthly Selling Rate Existing Homes Prior to good July (168K) numbers = 876K annualized 3 month moving average New Home

Foreclosure Pipeline Showing Cont’d Stress… % of loans 90 days past due % of loans in foreclosure, SA 28% 51% Source: Mortgage Bankers Association

Source: Mortgage Bankers Association Foreclosures Have Been Artificially Depressed Additional Foreclosures if Historical Rates Maintained Source: Mortgage Bankers Association

Single Family Starts Thousand Starts 2011 -7.9% 2012 19.4% 2013 20.1% 2014 35.9% 2015 21.4% 2016 13.8% 2017 4.8% =

Total Housing Starts Thousand Starts 1.1 Million Home Overbuild =

Cumulative Pent-Up Demand Thousand Starts = Upside Risk: Higher demolition rate due to unfit foreclosed properties

Share of SF Recovery Relative to Past Peak

Multi Family Starts Outlook

Multi Family Share of Housing Starts % Share of Starts 1975-1990 Prior to good July (168K) numbers = 876K annualized 3 month moving average 2002-2017 Years Before and After Recession Begins

Multifamily Starts Thousand Starts 2011 55.3% 2012 28.2% 2013 12.3% 2014 14.9% 2015 7.5% 2016 6.7% 2017 2.4% =

Nonresidential Construction

Nonresidential Outlook

Nonresidential Market Outlook Nonresidential construction up 14.4% 1st half 2012. First increase in nonresidential construction in four years. All nonresidential sectors expected to show growth in 2012 except religious. Large imbalances remain before a nationwide positive NOI materializes. Vacancy rates, while improved, remain high. Leasing rates still under pressure. Working off imbalances is tied to job creation, either directly or indirectly. Slower job outlook imply delayed recovery. Conditions for positive, and full recovery, ROI still years off. Credit environment hostile. Energy related construction can be a very strong regional factor.

Office Vacancy Rate Projections Dysfunctional Congress Rational Congress

Nonresidential Cement Consumption* Thousand Metric Tons = *Includes nonresidential and Oil, Farm & Utilities

Public Recovery

Public Outlook

Highways & Streets Outlook

Highway & Street Assessments MAP-21 incorporated though FY 2015 Equates to SAFETEA-LU levels allowing for 1.9% inflation. Two year commitment implies somewhat greater ability to target longer-term projects. PCA raises cement intensity slightly. PCA holds nominal levels constant throughout forecast horizon. Wild card: Impact of ten-fold increase in TIFIA ARRA dollars exhausted by mid-2013. An estimated 300K cement tons tied to ARRA in 2013. Near-term state highway spending based on minimum maintenance levels. Pent-up state demand released beginning in fiscal 2015. Facilitated by TIFIA Funds Competitive price position improves throughout forecast horizon. No change in states’ selection policies.

Roadway Cement Consumption Outlook Thousand Metric Tons State & Local Highway Bill =

Summary

Portland Cement Consumption Thousand Metric Tons Summer Forecast = 2011 2012 2013 2014 2015 2016 3.0% 6.9% 5.7% 10.6% 9.0%

Ed Sullivan, Chief Economist PCA Cement Outlook Fall Committee Meetings August 2012 Ed Sullivan, Chief Economist PCA