Cement Outlook: 2007 ACPA Meeting Greely, Colorado Ed Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve

Economic Comfort Index * 1996=100 Combines Real GDP With the Levels Interest Rates, Inflation and Unemployment Most Favorable Economic Conditions Since the 1960’s

Bottom Line Economic Growth Slows to 2.4% (Real GDP) Economic Growth Slows to 2.4% (Real GDP) Construction Declines = – 3% Construction Declines = – 3% Housing Starts Decline = -18% Housing Starts Decline = -18% Cement Consumption Declines = -1.5% Cement Consumption Declines = -1.5% Downside Risks Increased Downside Risks Increased

Economic Outlook

Economic Fundamentals Sound Economic Fundamentals Sound Unemployment, Inflation, Interest Rates Low Unemployment, Inflation, Interest Rates Low Current Strength Cushions Against Downside Risks Current Strength Cushions Against Downside Risks Past Growth of 3.3% is Unsustainable Past Growth of 3.3% is Unsustainable

Economic Outlook Consensus 2007 GDP Forecast: 2.7% Consensus 2007 GDP Forecast: 2.7% 2006 Real GDP Growth: 3.3% 2006 Real GDP Growth: 3.3% 1 st Quarter: 5.5% 1 st Quarter: 5.5% 2 nd Quarter: 2.6% 2 nd Quarter: 2.6% 3 rd Quarter: 2.0% 3 rd Quarter: 2.0% 4 th Quarter: 2.2% 4 th Quarter: 2.2% Past Three Quarter Average: 2.3% Past Three Quarter Average: 2.3% What is going to Propel Growth Beyond the Past Three Quarter Average? What is going to Propel Growth Beyond the Past Three Quarter Average?

Economic Outlook What is going to Propel Growth Beyond the Past Three Quarter Average? What is going to Propel Growth Beyond the Past Three Quarter Average? Budget Deficits Prevents Government Spending from Being the Growth Driver. Budget Deficits Prevents Government Spending from Being the Growth Driver. Housing Contraction Prevents Investment Spending from Being a Growth Driver. Housing Contraction Prevents Investment Spending from Being a Growth Driver. Net Exports are Improving. Sector So Small In Context of Overall Economy Prevents this from Being a Growth Driver. Net Exports are Improving. Sector So Small In Context of Overall Economy Prevents this from Being a Growth Driver. That Leaves Only Consumer Spending. That Leaves Only Consumer Spending.

Snap Shot of Economic Activity Consumption acts as the anchor for US economic activity. Any retrenchment in consumer spending will lead to slower economy-wide growth rates

Economic Outlook That Leaves Only Consumer Spending. That Leaves Only Consumer Spending. To Reach 2.7% Consensus Real GDP Growth…. To Reach 2.7% Consensus Real GDP Growth…. Consumer Spending Must Grow at a Rate of More than 3.5%. Consumer Spending Must Grow at a Rate of More than 3.5%. During Past Three Quarters, Consumer Spending Averaged 3.2% Growth. During Past Three Quarters, Consumer Spending Averaged 3.2% Growth. And… And…

Economic Outlook Consumer Spending has Relied On Debt. Consumer Spending has Relied On Debt. Net savings rate has been negative for years. Net savings rate has been negative for years. Consumer Debt Burdens Near Historical Highs Consumer Debt Burdens Near Historical Highs Often a precursor to reduction in consumption growth. Often a precursor to reduction in consumption growth. Sub-Prime Defaults Force a Tightening in Lending Standards Sub-Prime Defaults Force a Tightening in Lending Standards Reflects a new assessment of risk-return philosophy – beyond mortgages and perhaps globally. Reflects a new assessment of risk-return philosophy – beyond mortgages and perhaps globally. Interest Rates Stable...But… Interest Rates Stable...But… Shifting of Consumer Debt into Higher Risk/Higher Interest Rate Categories. Effective Interest Rates Rise. Shifting of Consumer Debt into Higher Risk/Higher Interest Rate Categories. Effective Interest Rates Rise. More Vulnerable to Actual Interest Rate Increases. More Vulnerable to Actual Interest Rate Increases. Can Debt Based Consumer Spending Thrive In This Environment? Can Debt Based Consumer Spending Thrive In This Environment? If not, growth in consumer spending slows. If not, growth in consumer spending slows. Income Growth is Improving – but perhaps not fast enough. Income Growth is Improving – but perhaps not fast enough.

Consumer Worksheet Pay Increase Averages 3.5%. Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%. Health Insurance Premiums Rise 7%-11%. State and Local Property Taxes Rise. State and Local Property Taxes Rise. Reassessments based on high home appreciation Reassessments based on high home appreciation Energy Prices Take a Large Bite. Energy Prices Take a Large Bite. Even in context of recent improvement. Even in context of recent improvement. Inflation Running near 2.5% Inflation Running near 2.5% Tapping Home Equity Not as Viable As In the Past Tapping Home Equity Not as Viable As In the Past Slowdown in Job Creation – 150K Per Month is Not Sustainable. Slowdown in Job Creation – 150K Per Month is Not Sustainable. If Job Creation Drops Below 100K on Sustained Basis – Expect a Significant Downward Revision in Forecast. If Job Creation Drops Below 100K on Sustained Basis – Expect a Significant Downward Revision in Forecast.

Economic Outlook : Real GDP Growth : 3.5% Real GDP Annual Growth Rate : 3.3% 2007: 2.4% 2008: 2.4% Consensus 2007: 2.7% Fed Eases

Risks: Sub-Prime Mortgages

Housing Threat Real threat to economic growth not the decline in housing….. But….. The way we financed the past boom… And… Its impact on consumer spending….. Potentially more profound in history

Home Price & Income Gap Annual Growth Rate Comparison Home Prices Household Income Disparity Prompts Introduction of Exotic Mortgages

Emergence of Exotic Mortgages Interest Only Loan Share of Sub-Prime Market Share by Principle Balance: Solid Green Share by Loan Count: Striped Yellow Note: Sub-Prime accounts for 36% total mortgage market

Sub-Prime Mortgage Resets Total Loans Scheduled for Reset Period of Emerging Trouble

Impact on Economic Growth Monthly Payments Increase 50% or More. Monthly Payments Increase 50% or More. Credit Card Debt Increases As Consumers Try To Preserve Standard of Living. Credit Card Debt Increases As Consumers Try To Preserve Standard of Living. Delinquencies Increase. Delinquencies Increase. Defaults Increase. Defaults Increase. Adverse Impact on Consumer Spending. Adverse Impact on Consumer Spending.

Economic Outlook Higher Loan Payments Credit Availability Shift Borrowers into Higher Rate Loans High Debt Levels Tightening of Lending Standards Higher Defaults Plus Impact On Consumer Spending =

Impact on Economic Growth Adverse Impact on Consumer Spending can be Contained. Adverse Impact on Consumer Spending can be Contained. As Long As…. As Long As…. Relatively Strong Job Growth Persists. Relatively Strong Job Growth Persists. And… And… Interest Rates Remain Stable. Interest Rates Remain Stable.

Risks: Foreign Capital In-Flows

Impact on Economic Growth Interest Rates Remain Stable. Interest Rates Remain Stable. Economy More Vulnerable to Interest Rate Increase. Economy More Vulnerable to Interest Rate Increase. High Debt High Debt Tight Standards Tight Standards Risk Adverse Lenders Risk Adverse Lenders Linkage to Consumer Spending via Past Home Equity Borrowing. Linkage to Consumer Spending via Past Home Equity Borrowing. Will Long Term Interest Rates Remain Stable? Will Long Term Interest Rates Remain Stable? Inverted Yield Curve Inverted Yield Curve Real, Inflation Adjusted, Rates Low Real, Inflation Adjusted, Rates Low

Net Foreign Purchases: US Bonds & Notes $ Millions Mortgage Rate

Foreign Capital In-Flows Studies Indicate: 50 to 200 Basis Point Impact on Mortgage Interest Rates. Studies Indicate: 50 to 200 Basis Point Impact on Mortgage Interest Rates. China Key Player in Mortgage Backed Securities (MBS). China Key Player in Mortgage Backed Securities (MBS). China Diversifying Reserve Portfolio Away From U.S. Assets. China Diversifying Reserve Portfolio Away From U.S. Assets. Governing Board Already Established. Governing Board Already Established. Weak Dollar Reduces Foreign Investor ROI on U.S. Assets. Weak Dollar Reduces Foreign Investor ROI on U.S. Assets. Defaults in Mortgage Market Reduce ROI on U.S. Mortgage Backed Securities. Defaults in Mortgage Market Reduce ROI on U.S. Mortgage Backed Securities.

Higher Interest Rate Resets: Force Increase in Defaults Foreign Capital Inflows Slow Defaults: Lower ROI on Holders of MBS Interest Rates Rise Foreign Capital In-Flows & Sub-Prime Threat

Risks Sub-Prime Sub-Prime Foreign Capital Inflows Foreign Capital Inflows Skepticism On Labor Market’s Ability to Continue to Generate 150K Net New Jobs Monthly Skepticism On Labor Market’s Ability to Continue to Generate 150K Net New Jobs Monthly Risks Elevated: One in Three Chance For Downside Correction Risks Elevated: One in Three Chance For Downside Correction Survey of Economists: Risk of Recession = 25% Survey of Economists: Risk of Recession = 25%

Construction & Cement Outlook Overview

Total Construction Billion 1996 $ 2007: Decline projected …BUT.. based off record levels Construction Spending (Real) Declines 3%

Changing Composition of Construction Spending Growth Growth Leader: Residential Growth Leader: Residential Low Interest Rates Low Interest Rates Public Public State Tax Revenues Hurt by Anemic Economic Growth State Tax Revenues Hurt by Anemic Economic Growth Growth Laggard: Nonresidential Growth Laggard: Nonresidential Weak Economy Weak Economy Growth Leader : Nonresidential Strong Economy Public State Tax Revenues Recovery Due to Strong Economic Growth Growth Laggard : Residential Rising Interest Rates Low Interest Rates, Weak Economy Rising Interest Rates, Strong Economy

Cement Intensities

Composition Of Cement Growth: Construction Activity Vs Cement Intensity Growth Cement Intensity Growth Construction Activity Growth Annual Percent Change, Real Put-In-Place Construction & Cement Intensity

Concrete: Run-up in Competing Material Prices Annual Percent Change, PPI, Bureau of Labor Statistics Concrete Asphalt Steel

Concrete: Improving Competitive Position Change Relative Price Vs Concrete Asphalt Steel Rapid Improvement in Concrete’s Relative Pricing Position

Oil Price Outlook $ Per Barrel, West Texas Intermediate Projected Oil Prices are declining as projected. Oil Prices are declining as projected. Retreat to 2002 levels not going to happen. Retreat to 2002 levels not going to happen. Strong International Demand Strong International Demand Japan’s Economic Recovery Japan’s Economic Recovery Stronger Asian Demand: China & India Stronger Asian Demand: China & India Supply Disruptions Continue Supply Disruptions Continue Middle East Uncertainties, Nigeria, Venezuela Middle East Uncertainties, Nigeria, Venezuela Iran & Uranium Enrichment Iran & Uranium Enrichment OPEC Actions OPEC Actions $60 per barrel target? $60 per barrel target? 2006: $65.85 per barrel WTI 2007: $ : $65.85 per barrel WTI 2007: $

Competitive Position Vs Asphalt Sustained high oil prices Plus….. More efficient refining processes Suggest….. New competitive position of Concrete is sustained… It is not a temporary phenomenon

Residential Construction

Past Strength in Starts More Than Low Rates… The Cyclical Upside: Low mortgage rates key factor in single family starts over past few years. Low mortgage rates key factor in single family starts over past few years. Emergence of exotic mortgages also a key factor…particularly in strong home appreciation environment. Emergence of exotic mortgages also a key factor…particularly in strong home appreciation environment. Easy credit conditions contributed to strong home-buying environment. Easy credit conditions contributed to strong home-buying environment. Speculators add froth to market in light of strong appreciation rates. Speculators add froth to market in light of strong appreciation rates. Lean inventories supplement demand …add strength to starts. Lean inventories supplement demand …add strength to starts. Each Factor at Work on Cyclical Downside:

Mortgage Rates: 30 Year Conventional Annual Growth Rate, 30 Year Conventional Peak to Trough 294 Basis Point Decline 6.5% Year End

No Such Thing as a “National” Market… Structurally Changed Markets Hurricanes (Louisiana) Hurricanes (Louisiana) Economically Depressed (Michigan) Economically Depressed (Michigan) Boom/Bust Markets Dynamic Economies Dynamic Economies Strong Demographics Strong Demographics Robust Appreciation Rates Robust Appreciation Rates High Presence of Speculators High Presence of Speculators Large Inventory Overhang, Large Starts Decline, Slow Recovery Large Inventory Overhang, Large Starts Decline, Slow Recovery 2009 Surprising Strength 2009 Surprising Strength Arizona, Nevada, Florida & California = 28% Cement Consumption Arizona, Nevada, Florida & California = 28% Cement Consumption “Normal” Markets More Modest Appreciation More Modest Appreciation Relatively Low Speculator Presence Relatively Low Speculator Presence Smaller Inventory Overhang Smaller Inventory Overhang More shallow decline, Quicker Recovery More shallow decline, Quicker Recovery

Home Prices: Will Play a Role in Correction Annual Growth Rate, Median Home Price Price Will Play Strong Role In Recovery But… In Context of Tighter Lending Standards

Single Family Sales Outlook: New Homes Percent Change 2006: 1,064: -16.7% 2007: 1,055: -1.4% Projected Relatively Low Mortgage Rates, Home Price Correction, Builder Incentives, Relatively Strong Labor Markets Versus Tighter Lending Standards Back-Ended Gains

Inventory of Single Family Homes Number of Homes for Sale, Thousands: Bar Months Supply: Line Projected 6.3 Months

Single Family Starts Outlook Percent Change Projected

Nonresidential & Public Construction

Nonresidential Construction Percent Change 2006: $147.1 Billion: +12.3% 2007: $159.5 Billion: +8.4%

Retail Construction Percent Change 2006: $43.7 Billion: +6.9% 2007: $46.7 Billion: +6.8% Accounts for Roughly 40% of Nonresidential Cement Consumption

Public Construction 55% of PA Consumption

Public Construction Outlook: State & Local Share of Public Construction Percent of Total Public Construction Spending

Public Construction Outlook 93% of public construction performed at state/local level. 93% of public construction performed at state/local level. State/Local fiscal problems fading. State/Local fiscal problems fading. Revenue growth improves with economy and job growth. Revenue growth improves with economy and job growth. Surpluses will re-emerge. Surpluses will re-emerge. Pent-up demand released. Pent-up demand released. Highway Bill adds strength. Highway Bill adds strength. 2006: +4.8% 2007: +5.5% 2006: +4.8% 2007: +5.5% Note: 2005: +1.9% Note: 2005: +1.9% Billion $ State Surplus/Deficit, NIPA

MA RI NH 0-9%20-29% 30-39% Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic 10-19% Deficit as percentage of budget $.85 $.11 $1.0 $.16 $0 $.36 $.4$.98 $0 $1.5 $.05 $.38 $.3 $.12 $38 $3.7 $3.6 $.6 $.22 $.41 $1.0 $.09 $2.4 $0 $2.0 $.75 $.5 $.49 $1.3 $1.7 $.2 $2.4 $9.3 $2.0 $.74 $4.6 $.14 $.4 $.15 $3.0 $.17 $.85 $.2 NJ $1.9CT MD DE VT $.25 $1.1 $2.0 $.03 $.08 Primary Source: Newsweek July 28, 2003 Secondary Sources: Nat’l Conf. of State Leg., Center on Budget and Policy Priorities, Nat’l Assn. of State Budget Officers, Calif. Budget Project Dollar figures, in billions, indicate amount states had to save to balance 2004 budget. KEY Public Construction Outlook: State Deficit Estimates Fiscal Year 2004

MA RI NH Public Construction Outlook: State Deficit Estimates Fiscal Year %20-29% 30-39% Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic 10-19% Deficit as percentage of budget $0 $.3 $1.1 $.17 $15 $0 $2 $.5 $.34 $.71 $.19 $.0 $.6 $.62 $.17 $.9 $0 $5.1 $5 $.14 $0 $1.5 $.19 $.74 NJ $.2CT MD $.93 $.8 Secondary Source: National Association of Budget Officers Dollar figures, in billions, indicate amount states had to save to balance 2005 budget. KEY No available data DE$0 $.9 $0 $.6 $.2 $.9 $0 $.21 $0 $.3 $0 $.5 $0 VT$0 $.12 $0 Primary Source: Center on Budget Policy and Priorities Feb / 04

Construction Costs Annual Growth Rate +7.2% 2006 First Half

Market Conditions Import Volumes: 2007

No ShortageTight Supplies Cement Supply Survey Summer 2005 Spot Tight Supplies

No ShortageTight Supplies Cement Supply Survey Summer 2006 Spot Tight Supplies

Portland Cement Outlook Thousand Metric Tons 2006 – 2007: A Pause Before A Resumption in Growth Cement Consumption Declines 1.5%

World Cement Consumption Million Metric Tons China Developed Economies Lesser Developed, Transitional and Emerging Economies

Freight Rates Freight $ Per Ton, Handymax, Asia-Gulf

Dry-Bulk Ship Retirement Thousand, Deadweight Tons

HandySize Fleet Changes Thousand, Deadweight Tons New Deliveries Retirements Source: Simpson, Spence & Young

Dry-Bulk Ship Retirement to Increase Thousand, Deadweight Tons Actual, Retirement 2% Of Fleet Retirement Potential Additional Retirement: 22 mdwt

Import Outlook 2007 Worksheet Consumption = 1.5% Decline Consumption = 1.5% Decline Domestic Utilization = Same as 2006 (94%) Domestic Utilization = Same as 2006 (94%) Inventory = 19 Days Supply Inventory = 19 Days Supply 770K Draw 770K Draw Note: Added 1.1 Million MT in 2006 Note: Added 1.1 Million MT in 2006 Imports 2007 = 33.1 MMT (-7.8 %) Imports 2007 = 33.1 MMT (-7.8 %)

Conclusions

Portland Cement Outlook Thousand Metric Tons 2006 – 2007: A Pause Before A Resumption in Growth Growth Materializes When All Three Sectors (Residential, Nonresidential & Publics Grow)

Cement Outlook: 2007 ACPA Meeting Greely, Colorado Ed Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve