Construction Outlook: Ed Sullivan, Chief Economist PCA Independent Equipment Dealers Association February 2011 Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Real Construction Spending Billion Real $ %

Cement Capacity Utilization Percent Capacity Utilized Excess Capacity, Depressed Earnings

Economic Outlook

Sub-Prime/Exotics Lending Standards Energy Labor Markets State Deficits Economic Adversity Abates 2011/12 The abatement of the conditions that put us in recession…are receding…but remain in place. 2011

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

Commercial Risk Premiums Spread between Treasury and BAA Source: Federal Reserve, PCA Projections Projected Corporate Risk Premiums Serve as a Proxy for Bank Lending Attitudes Toward Risk

Consumer Sentiment Risks Source: Conference Board, PCA Projections Projected

Synchronized Theory: Problem = Policy Support Traditional Monetary Policy’s effectiveness is limited.  Interest rates already low  “Liquidity Trap”  Federal Reserve Concerned.  Didn’t Act Traditionally. Quantitative Easing, or, QE2 is Born.  Similar to open market operations….but…  Potentially broader asset classes (harder to control money supply growth).  Blurred “easy landing” guideposts.  Under shoot = Risk Double Dip  Over shoot = Risk powerful inflationary pressures

Housing Recovery

Housing Starts: Recovery Muted Thousand Starts

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

Foreclosures Accelerate Foreclosure Impacts Add to Inventory Depress Prices 3.4 Foreclosures in Mil Bank possessions. Equates to one out of every 4 homes on the market. Depressed Homebuilder ROI Adds supply. Bank owned properties discounted. Pressures new home prices. Longer carry costs. Lower revenues. Erodes expected ROI. Delays recovery in starts.

Residential: Re-Set Scenario $ Billion Subprime Resets Alt-A Option Adjustable

Residential: Bank Possession Projections Million Homes

Months’ Supply: Single Family Number of months required to burn off existing inventory at current selling rates Source: PCA Projections Projected

Single Family Starts Projections Thousand Homes

Residential: Upside Risks Thousand Starts Pessimists Optimists

Nonresidential Drag

Nonresidential Conclusions No longer a significant drag on construction activity. Large imbalances exist in before a positive NOI materializes  Slow job growth implies slow healing process Credit environment hostile. Conditions for positive ROI years off. Not a significant contributor to cement consumption growth until 2013

Office Buildings: Recovery Process New Office Hiring Vacancy Rates Decline Leasing Rates Stabilize Credit Troubles Ease Asset Prices Firm 1/5 of all jobs in the office. After reaching threshold of roughly 14% vacancy rate Defaults & perceived lending risks decline Leads to a recovery in office construction.

Office Recovery Timing Thousand Office Jobs 2.4 million office jobs lost

32.0 Million Office Jobs Equates to Full Occupancy 27.5 Million Office Jobs Equates to Stable Leasing Rates 27.0 Million Office Jobs Today 500,000 Office Jobs must be created before leasing rates stabilize Implying….. Since 1 in 5 Jobs Are In The Office This equates to a total job creation number of roughly 2.5 million Jobs This condition may not materialize until 2012 Office Buildings Recovery Timing

Nonresidential Construction Projections Billion Real $1996

Public Recovery

ARRA Spending Composition Assumptions Billion $ Resurfacing Widening & New Route Bridge Chart Excludes “Other” Spending

FY 2011 Budget Gaps State Fiscal Conditions 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 Source: PCA/CBPP Oct Source: PCA/CBPP Oct No Shortfall Under 11%11%-20% Over 20%

State Deficits $ Real National Estimates: States Do Not Heal in a Synchronized Fashion Slow Job Creation Leads to Slow Deficit Heal

Discretionary State Highway Cement Consumption Thousand Metric Tons

SAFETEA-LU Math SAFETEA-LU - Delay in Extension-1 to -2 MMT 0 MMT - Recapture to +2 MMT Volume Impact- 1 to -2 MMT +1 to +2 MMT Net Change 2011 (No Delay)+2 to +4 MMT

Portland Cement Consumption: Highway Thousand Metric Tons State Discretionary Highway Bill Stimulus

Beyond the Crisis “New Normal” or “New Headaches”

Real Construction Spending Billion Real $1996

 American consumer, the engine of US economic growth  May distance from debt spending patterns (lowering GDP).  Baby boomers may not re-capture wealth  Higher inflation erodes spending.  Impacts  Slower growth – Is 50 basis point enough? After the Crisis: “New Normal”: Economics

 Fiscal Policy  Stimulus spending must be paid for…resulting in higher interest rates, higher taxes, and potentially higher inflation.  Monetary policy easing (U.S. & global) & QE2  Could add to inflationary pressures.  QE2 compounds the inflationary risks.  Raises prospects of Federal Reserve tightening.  Weakens dollar in context of large public debt.  Heightens debt costs.  Opens door for fiscal austerity.  Key economic consequences  American consumer, the engine of US economic growth, may distance from debt spending patterns (lowering GDP).  Dollar may show a structural weakening.  …combining for the potential of slower longer term economic growth (50 basis points). After the Crisis: “New Normal”: Policy

 Not a typical recession recovery.  Amplified by structural corrections.  Amplified by possible policy errors.  Long impacts  Pent-Up Demand  Being generated across all sectors.  Longer period of distress, more pent-up demand  Timing and magnitude of release impacted by economy.  Regional impacts from resulting growth.  Residential, nonresidential & public synchronized – 2013 & Beyond.  Typically suggests strong cement consumption growth rates. After the Crisis: “New Normal”: Construction

Emerging economies, led by China/India, account for key growth drivers. Accounts for larger share of world GDP than OECD by 2014 (IMF). Exerts “new” potent demand on world markets “Synchronized” world growth returns Commodity prices (oil), freight rates, trading patterns subject to change. Impacts concrete competitiveness (oil prices = paving position, residential ICF) Impacts sourcing decisions – high freight rates raising import costs. New challenges could lead to potentially new economic/political tensions. After the Crisis: “New Normal”: Global

Researchers at the MIT Concrete Sustainability Hub are working to quantify the full cradle-to-grave life-cycle environmental and economic costs of paving and building materials. Residential Buildings – More than 90% of the life-cycle carbon emissions are due to the use phase, with construction and end-of-life disposal accounting for less than 10% of the total emissions. Residential Buildings – Concrete structures built with insulated concrete forms (ICF) enjoy long-term operational energy savings of 20% or more over wood- framed buildings. In the context of synchronized world growth, higher oil prices, homebuyers may increasingly emphasize energy saving aspects of concrete homes. After the Crisis: “New Normal”: MIT

 Activist EPA  Plant shut downs  High compliance costs.  New Source regulations!  Resumption of demand growth  Import Dependence Grows  In context of weak dollar  In context of emerging economy demand growth  Higher freight rates.  Sourcing strategies  Near term, import dependence – longer term? After the Crisis: “New Normal”: Regulation

Cement Consumption: Long Term Million Metric Tons Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution.

Construction Outlook: Ed Sullivan, Chief Economist PCA Independent Equipment Dealers Association February 2011 Named Most Accurate Forecaster By Chicago Federal Reserve, 2009