Cement Outlook: 2007 FAEC Meeting Chicago, Illinois Ed Sullivan Staff Vice President and PCA Chief Economist

Introduction

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

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 growth.  Responsible debt?  Easy terms & standards  Unprecedented link in consumer spending to housing wealth.   Payback is tough – maybe more than consensus of economists believe.

Introduction  Economic Growth Slows  Housing Problems Persist  Sub-prime leakage to consumer spending  Oil prices remain high  Reassessment of lending risks….globally

Bottom Line: Risks/Adjustments Economic Growth Slows to 1.9% Economic Growth Slows to 1.9% Sub-Prime leakage Sub-Prime leakage Energy Prices Energy Prices Weak 1 st Quarter Weak 1 st Quarter Construction Declines 4% Construction Declines 4% Sub-Prime Default Rate….Larger inventory problems Sub-Prime Default Rate….Larger inventory problems Housing Starts decline even deeper and more prolonged Housing Starts decline even deeper and more prolonged Slower economy = Slower Nonresidential Slower economy = Slower Nonresidential Cement Consumption Declines 4% to 5% Cement Consumption Declines 4% to 5% Larger decline in construction spending Larger decline in construction spending Intensity Gains may not be as strong Intensity Gains may not be as strong

Portland Cement Outlook Thousand Metric Tons 2006 – 2007: A Pause Before A Resumption in Growth You Can Argue Depth of Housing Decline, Timing of Recovery…Not Fundamentals of Longer Term Growth Growth Slows When One of Three Sectors (Residential, Nonresidential & Public) Declines

Key Points of Analysis U.S. Economic Outlook Construction Outlook Cement Outlook Residential Nonresidential Public Demand Operating Conditions

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: 2.4% Consensus 2007 GDP Forecast: 2.4% 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% 1 st Quarter 2007: 0.7% 1 st Quarter 2007: 0.7% Past Four Quarter Average: 1.9% Past Four Quarter Average: 1.9% What is going to Propel Growth Beyond the Past Four Quarter Average? What is going to Propel Growth Beyond the Past Four Quarter Average?

Economic Outlook What is going to Propel Growth Beyond the Past Four Quarter Average? What is going to Propel Growth Beyond the Past Four 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 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. Tapping Home Equity Not as Viable As In the Past Tapping Home Equity Not as Viable As In the Past 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% Slowdown in Job Creation – 180K Per Month is Not Sustainable. Slowdown in Job Creation – 180K 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.

Oil Price Outlook $ Per Barrel, West Texas Intermediate Projected Oil Prices Oil Prices 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: $

Economic Outlook : Real GDP Growth : 3.5% Real GDP Annual Growth Rate : 3.3% 2007: 1.9% 2008: 2.4% NABE Consensus 2007: 2.7%

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

Growing Home Price & Income Gap Annual Growth Rate Comparison Home Prices Household Income

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.

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.

Conclusion Economic Growth Slows Economic Growth Slows Extent of Slowdown Uncertain Extent of Slowdown Uncertain Sub Prime Sub Prime Energy Energy 2.4% Real GDP now seems strong 2.4% Real GDP now seems strong Risk Hinges Largely on Sub-Prime “Leakage” Risk Hinges Largely on Sub-Prime “Leakage” Threat not to be dismissed Threat not to be dismissed

Construction & Cement Outlook Overview

Total Construction Billion 1996 $ 2007: Decline projected …BUT.. based off record levels

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

Construction Share of Activity Change Relative Price Vs Concrete Public Nonresidential Residential

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

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:

Single Family Sales Trend: Compared to Year Ago Levels Percent Change, Year Ago (%) Double Digit Declines Will Fade When Compared Against Weaker 2006 Data – Beginning in July Improvement in Year Over Year Comparisons Does Not Imply a Strong Market or Improvement in Inventory Conditions

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

Single Family Price Trend: Existing Homes Compared to Year Ago Levels Percent Change, Year Ago (%) High Inventories Will Depress Prices Throughout 2007 and into Projected

Mortgage Rates Annual Percent Interest Slow Improvement in Inflation, Tightening in Global Liquidity & Reassessment of Risk Push Mortgage Rates Higher Projected

Lenders Reporting Tighter Lending Standards: Mortgages Easy Credit Period Tighter Credit Will Undermine Sales Recovery Latest Data: Largest Increase Since Conditions Preceding 1991 Recession Percent Reporting Tighter Lending Standards

Single Family Affordability Trend: New Homes Percent Change Home Prices, Year Ago (%): Yellow Pricing Softness Will Improve Affordability Projected New Mortgage Payment as % of Household Income: Red

Single Family Sales Trend Thousand Units, Seasonally Adjusted Annual Selling Rate Projected Sales Recovery is Expected to be Modest

Home Inventory Existing New Thousands of Homes for Sale, April New Existing New

Worst Case ScenarioPCA Scenario Exotic Market1,782,000,000,000 Default Rate30.00%6.00% Homes Into Default2,227,500445,500 GDP Growth0.3%2.4% Risk to Baseline Construction Government Intervention Will Materialize Well Before 30% Default Rate

Single Family Starts Outlook Percent Change Projected

Nonresidential & Public Construction

Construction Spending: NonResidential Billions $1996 Source: Department of Commerce, PCA

Office Construction: Vacancy Rates Billions $1996 Peak to Current Change Suburban: -4.3 Basis Points Downtown: -4.3 Basis Points Metro Area: -4.0 Basis Points Metro Area Suburban Area Downtown Area

Office Construction: Investment Returns NPI Index, National Council of Real Estate Investment Fiduciaries

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. Billion $ State Surplus/Deficit, NIPA

Construction Spending: Public Billions $1996 Source: Department of Commerce, PCA

Construction Conclusion Nonresidential & Public Strong Growth Nonresidential & Public Strong Growth Low Risk Low Risk Residential Correction Residential Correction Baseline May understate Decline Baseline May understate Decline Inventory & Price Correction Key Inventory & Price Correction Key Baseline Inventory Probably Understated Baseline Inventory Probably Understated Total Construction Downside Risk Total Construction Downside Risk Risk: Largely Residential Inventory Risk: Largely Residential Inventory Aside from General Economic Risks Aside from General Economic Risks

Market Conditions

Market Conditions Import Volumes: 2007

Which Market Condition Will Future Hold? Economic Growth Assessment Economic Growth Assessment Construction Assessment Construction Assessment Cement Consumption Assessment Cement Consumption Assessment Domestic Production Assessment Domestic Production Assessment Import Assessment Import Assessment Demand Supply

Capacity Utilization Vs Import Share “Swing Supply Strategy” Capacity Utilization Import Share Market Digests New Capacity

Market Balances: Inventory Adjustment Adjusted Supply Vs Consumption Green: Domestic Yellow: Imports Green: Inventory Red: Day Supply High Freight Rates Low Freight Rates

No ShortageTight Supplies Cement Supply Survey Summer 2005 Spot Tight Supplies

Market Balances: Trend Inventory Adjustment Adjusted Supply Vs Consumption Green: Domestic Yellow: Imports Green: Inventory Red: Day Supply Low Freight Rates High Freight Rates Low Freight Rates High Freight Rates

No ShortageTight Supplies Cement Supply Survey Summer 2006 Spot Tight Supplies

Imports: SAAR Million Metric Tons, Seasonally Adjusted Annual Rate 1 st Q: 42 MMT Rate 2 nd Q: 38 MMT Rate 3 rd Q: 34 MMT Rate 4th Q: 31 MMT Rate 2 nd Half 2006: Import Rate Contracts Some Re-Tightening of Market January: 28.1 MMT SAAR

Freight Rates $ Per Ton to Gulf From Europe From Asia Source: Intercem

Dry-Bulk Ship Retirement Thousand, Deadweight Tons

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

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

Import Conclusion Import Volume Declines Import Volume Declines Freight Rate Risk on Volume Freight Rate Risk on Volume Larger declines than anticipated very likely Larger declines than anticipated very likely January Data (latest) = -30.9% (28 MMT SAAR) January Data (latest) = -30.9% (28 MMT SAAR) Potential Exists for Market Tightening…Even in Face of Declining Volume Potential Exists for Market Tightening…Even in Face of Declining Volume Single digit declines in volume Single digit declines in volume Double digit decline in imports Double digit decline in imports

Long Term

US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Demographics: Population Adds 65 Million Persons Population Adds 65 Million Persons Adds 9.1 Million School Age Persons Adds 9.1 Million School Age Persons Education Construction Education Construction Adds 34 Million Retirement Age Persons Adds 34 Million Retirement Age Persons Medical Medical Adds 31 Million Households Adds 31 Million Households Housing, Retail & Infrastructure. Housing, Retail & Infrastructure.

Highway Lane Miles Thousands of Miles Just to Maintain Current Highway Congestion Levels, Federally Aided Highways Must Expand Nearly 25% by Given 49 Million Additional Licensed Drivers.

10% + 0% to 1% Share Total U.S. Population Growth: 65 Million Persons Share of U.S. Population Growth (Percent Share of Total) 1% to 3%3% to 10% Note: 47% of Total Population Growth Occurs in California, Texas and Florida Source: U.S. Bureau of Census

Cement Consumption: Long Term Million Metric Tons

U.S. Capacity Growth Thousand Metric Tons : Industry Expands by More Than 20% - Adds 24 MMT of Capacity

U.S. Capacity Growth: Financial Investment History Estimated, Thousands 2005 Dollars : Industry Invests $5.4 Billion in Plant Expansion

10% + 0% to 1% Share Total U.S. Capacity Expansion: 24.2 Million Metric Tons Share of U.S. Plant Expansion (Percent Share of Total) 1% to 3%3% to 5% Source: PCA 5% to 10%

Conclusions

Cement Outlook: 2007 FAEC Meeting Chicago, Illinois Ed Sullivan Staff Vice President and PCA Chief Economist