Ed Sullivan, Chief Economist PCA Cement Outlook: 2009 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….
Key Questions How deep will retrenchment go ? How long will it last ? What recovery to expect? Key Questions
The Bottom Line Economic outlook remains dim….and will get darker. Adverse momentum will characterize economy through the first half of 2009. Tepid growth thereafter. No recovery in housing until 2010 Nonresidential faces steep retrenchment…recovery in 2011. Potential of fiscal crisis at State level brewing…public declines with no recovery until 2011. Sharp Recovery may materialize beginning in 2011
Portland Cement Consumption Thousand Metric Tons Declines Continue Through 2010. One Year Later than Previously Expected =
Portland Cement Consumption - Annual Change, Thousand Tons = Peak (2005)-to-Trough (2010) Decline: 41 MMT (Worst in History)
Near Term Conclusions Double-digit decline in consumption with trough in 2010. Large capacity increases magnify potential market imbalances. Accelerated shutdown in wet & old long dry kilns reduces some imbalances. Longer maintenance shutdown periods. Imports record large, sustained declines. Global conditions suggest freight rates continue slide. May contribute to 2009-2010 market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009-2010. Days Supply Inventory remains above historical average. Most pressure materialize in 2009-2010.
It is a Recession, and going to last longer than previously expected Economic Outlook It is a Recession, and going to last longer than previously expected
Economic Outlook: Five Factors Financial Crisis Energy/ Inflation Labor Markets State Deficits Sub-Prime Mortgage Payments Credit Cards Defaults Tight Lending Standards Home Price Declines Reliance on Home Equity Gone Defaults Write-Downs Risk Aversion Tight Lending Standards Commercial, Consumer, homeowner capital access reduced Global Structural Global Realities Gasoline Prices Heating Prices Fertilizer/Biofuels hit Ag Prices Supply Side Costs Ingrained Cost of Business Adds Weakness to Dollar Slower Economic Growth One Million Job Loss in 2008 Housing Recovery Delayed Nonresidential Declines State Fiscal Crisis Looming Public Declines Slower Job Revenues Slow Entitlement Programs Continue Deficits Drag on Recovery Offsets Possible Federal Stimulus Package
Economic Adversity 2006 2007 2008 2009 2010 Sub-Prime Energy Financial Crisis Inflation Labor Markets State Deficits
Consumer Confidence - Annual Change, Thousand Net Jobs = Sentiment Is Already at 30 Year Lows
Net Job Creation (Loss) - Annual Change, Thousand Net Jobs = Job Loss 2008 = 1.2 Million Job Loss 2009 = 1.8 Million Unemployment Peaks at 7.5% Mid-2009
Economic Growth Outlook Percent Change, GDP Growth Rate Tax Rebate Bump
Economic Policy Impacts
Transmission Mechanism: Simple/Effective Stronger Economy Increased Liquidity $700 Billion Banks Stronger Averts Economic Meltdown: But May have Muted Impact in Stimulating Economy
Transmission Mechanism: Longer/Weaker Reduced Risk Aversion $700 Billion Increased Liquidity Banks Stronger Stronger Economy Lending Risk Increases Compromises Liquidity Further Write downs Economy Weakens Longer Financial Adjustment Period Than Many Expect
Policy Assessments Rebate impact of spring has dissipated. Stimulatory impact of rate cuts waning and not as effective as historical measures. Issue not level of interest rates Financial bailout is a stop gap measure not a true stimulus policy. Economic adversity gains momentum in absence of a major fiscal policy initiative. First half 2009 action. $150 Billion. Infrastructure – Higher “Multipiers” Will increased Federal spending work in the face of large cuts in state and local spending? Aid to States
Oil Price Changes - Annual Change, Dollars Per Barrel Declining Oil Prices Help 2009. Adds $100 - $150 Billion. =
Residential Outlook Recovery Delayed
Single Family Housing– United States 000 Starts = Housing Peaked January 2006 2007: -29% 2008: -37% 2009: 0.0% 2010:+34%
Residential Cement Consumption - Annual Change, Thousand Tons = Peak (2005)-to-Trough (2010) Decline: 19 MMT = 63% of Total Decline
Future Weakness Residential Weakness is largely over. Most of Future Weakness Tied to Nonresidential & Public Cement Consumption.
Nonresidential Construction
Nonresidential: Portland Cement Consumption Thousand Metric Tons Declines Continue Through 2010. = Recovery Could be Strong
Nonresidential Cement Consumption - Annual Change, Thousand Tons = Peak (2005)-to-Trough (2010) Decline: 5 MMT
Public Construction
Source: National Conference of State Legislatures Fiscal 2009 Revenue Outlook District of Columbia Pessimistic Concerned Stable Optimistic Source: National Conference of State Legislatures
Net Job Creation (Loss) - Annual Change, Thousand Net Jobs = Job Loss 2008 = 1.2 Million Job Loss 2009 = 1.8 Million Unemployment Peaks at 7.5% Mid-2009
Public: Portland Cement Consumption Thousand Metric Tons Declines Continue Through 2010. =
Public Cement Consumption - Annual Change, Thousand Tons = Peak (2005)-to-Trough (2010) Decline: 12 MMT
The Cyclical Correction Market Imbalances The Cyclical Correction 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….
Portland Cement Consumption - Annual Change, Thousand Tons = Peak (2005)-to-Trough (2010) Decline: 31 MMT (Worst in History)
Capacity Expansion Thousand Metric Tons Stated Capacity Expansions Potential Increases From Specification Changes
Market Imbalances - Changes in Cement Consumption Tons + Capacity Expansion Tons = 1980-82 1990-91 2000-01 2007-2010 1973-74
Import Volume Thousand Metric Tons
Declining Freight Rates Coincide With Capacity Expansion Freight Rates: Handymax and Handysize U.S. $/Metric Ton Declining Freight Rates Coincide With Capacity Expansion Handymax Handysize = Import Projections for 2009-2010 Contain Upside Risk: Magnifying Potential Market Imbalances
Capacity Adjustments * Thousand Metric Tons Capacity Adjustments Due to Delayed Expansions and Plant Closures * Adjustments Include Five Delays in Plant Commissioning and Seven Plant Closures
Average Days Supply Inventory Cement Inventory/ Daily Selling Rate 17 Days Supply = Historical Average
Capacity Utilization Rates Clinker Production/Clinker Capacity
Near Term Conclusions Double-digit decline in consumption with trough in 2010. Large capacity increases magnify potential market imbalances. Accelerated shutdown in wet & old long dry kilns reduces some imbalances. Longer maintenance shutdown periods. Imports record large, sustained declines. Global conditions suggest freight rates continue slide. May contribute to 2009-2010 market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009-2010. Days Supply Inventory remains above historical average. Most pressure materialize in 2009-2010.
Mid-Term Recovery 2011-2013 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….
Mid-Term Conclusions: 2011-2013 Stimulus package. Provides floor and generates modest job creation in 2010. Easing in Tight Lending Standards. Lower risks A year recovery from sub-prime (mid-2010) Oil prices low. Interest rates low. Inflation low. Consumer debt re-balanced. Inventory/sales ratio entering recession low. Pent-up demand
Mid-Term Conclusions Economy: Recession re-sets imbalances. Energy, Debt, Inflation Financial conditions begin sustained improvement 2010. Stimulus program likely by mid-2009. Lean inventories entering recession. V-Shaped Recovery – unlike last recession is expected to materialize. Residential: Home price declines improve affordability Pent-up demand has been generated. Easier lending conditions will eventually materialize. Large percent gains are expected to materialize once stronger labor market returns. Nonresidential: Pent-up demand and unfinished business Stronger ROI materialize with V-Economic Recovery Easier lending conditions and lower risk premiums. Government: Strong job growth associated with V-Recovery implies a rapid improvement in state fiscal conditions.
Single Family Housing– United States 000 Starts Pent-Up Demand = Housing Peaked January 2006 2007: -29% 2008: -37% 2009: 0.0% 2010:+34%
Housing: Pent-Up Demand is Being Generated ! 000 Starts = Housing Peaked January 2006 2007: -29% 2008: -37% 2009: 0.0% 2010:+34%
Nonresidential Long Term Trend Million Real $, 1996 =
Current: Gasoline Prices Vs Asphalt Prices Per Barrel Price Per Barrel
Gasoline - Asphalt Margin Per Barrel Differential - Net Threshold of $14 Per Barrel Price Differential Per Barrel Threshold Differential = $14 per barrel Estimated on a Ten Year Payoff for Coker Investment
Announced New Coker Installations Cumulative: Thousands of Barrels Per Day
Liquid Asphalt Supply Thousands of Barrels 44 Million Barrel Decline by 2011
Parity Achieved in Fiscal 2009 Projected: Initial Bid Concrete Vs Asphalt Paving Costs Per Two Lane Road Mile - Urban Asphalt Concrete Parity Achieved in Fiscal 2009
Concrete Advantages Materialize in Fiscal 2009 Projected: Life Cycle Concrete Vs Asphalt Paving Costs Per Two Lane Road Mile - Urban Asphalt Concrete Concrete Advantages Materialize in Fiscal 2009
Portland Cement Consumption Thousand Metric Tons =
Ed Sullivan, Chief Economist PCA Cement Outlook: 2009 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….