Construction & Cement Outlook ACI/APRMCA 2007 Joint AGM February 16, 2007 St. John, NB David E. Czechowski - Sr. Canadian Economist Economic Research Portland Cement Association

Key Points of Analysis U.S. Economy Canadian Economy Canadian Cement Demand & Supply Atlantic Provinces Demand & Supply

Key Near Term Issues Oil Prices Oil Prices Is the recent rundown sustainable? Where is International Demand/Disruptions/OPEC? Inflation Inflation Will it subside enough to satisfy the Fed? Interest Rates Interest Rates Resumption in increases? Housing Decline Housing Decline Hard or Soft landing? Job Creation Job Creation

(Change from prior month) Nonfarm Employment Job Growth 2005: Million 2006: Million 2007: Million Thousands

Consumer Under Pressure Pay Increase Averages 3.5%. Pay Increase Averages 3.5%.  Health Insurance Premiums Rise 7%-11%  State and Local Property Taxes Rise  Home appreciated reassessment Energy Prices Take a Bite Energy Prices Take a Bite Interest Rates Rising in Context of Record Debt Interest Rates Rising in Context of Record Debt Tapping Home Equity Bank Not as Attractive Tapping Home Equity Bank Not as Attractive Slowdown in Job Creation Slowdown in Job Creation Consumer Confidence Flat Consumer Confidence Flat

Real Investment Nonresidential Structures & Equipment Qtr/Qtr % Change

Investment Spending Higher Expected ROI Pent Up Demand Corporate Profits = Internal Funds Low Interest Rates = External Funds Unfavorable Factors Favorable Factors Strong, But Slower Investment Spending Growth Construction Costs Energy Prices

Real GDP Growth % Qtr-Qtr Annual Growth Rate %2.6%2.4% Risks On Downside -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4

Changing Composition of Construction Spending 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 Steady Economy Public State Tax Revenues Recovery Due to Economic Growth Growth Laggard : Residential Rising Interest Rates Low Interest Rates Weak Economy Rising Interest Rates Steady Economy

Housing Activity More Than Low Rates… The Cyclical Upside: Low mortgage rates Low mortgage rates Emergence of exotic mortgages Emergence of exotic mortgages Easy credit conditions Easy credit conditions Speculators add froth to the market Speculators add froth to the market The Cyclical Downside: Mortgage rates will rise Mortgage rates will rise Inventory Draw Inventory Draw Exotic mortgages losing favor Exotic mortgages losing favor Defaults/delinquencies deteriorate credit quality and tighten conditions Defaults/delinquencies deteriorate credit quality and tighten conditions Speculators reduced/disappear in lower appreciation rate environment Speculators reduced/disappear in lower appreciation rate environment

Sub-Prime Mortgage Resets Total Loans Scheduled for Reset 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50, Period of Emerging Trouble

Million Units Single Family Starts

Nonresidential Construction Underlying nonresidential drivers improving Underlying nonresidential drivers improving Despite gains for 2006, most markets weak from historical perspective Despite gains for 2006, most markets weak from historical perspective Slower growth outlook depresses expected ROI and tempers recovery Slower growth outlook depresses expected ROI and tempers recovery High material costs reduce growth High material costs reduce growth Billions 1996$

Public Construction 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 Pent-up demand released Pent-up demand released Highway Bill adds strength Highway Bill adds strength $Billion State & Local Government Surplus

Public Construction Billions 1996$

U.S. Construction Outlook Billions 1996$

Conclusions Residential Easement Modest Residential Easement Modest Mortgage Rate Increases Subdued Mortgage Rate Increases Subdued Affordability Improves Affordability Improves Nonresidential Recovery Nonresidential Recovery Turning Points Already Achieved Turning Points Already Achieved Still Weak from a Historical Perspective Still Weak from a Historical Perspective Recovery within Sectors Differ Recovery within Sectors Differ Retail/Hotel/Industrial Lead Retail/Hotel/Industrial Lead Institutional/Office Lag Institutional/Office Lag Public Waiting In Wings Public Waiting In Wings State Fiscal Recovery State Fiscal Recovery Pent-up Demand Pent-up Demand SAFETEA SAFETEA

U.S. Cement Outlook

Portland Cement Consumption Year-Year % Change Harsh Winter Mild Winter YTD 0.9%

No ShortageTight Supplies Cement Supply Survey Summer 2006 Spot Tight Supplies

Cement Intensity Favorable Relative Price Conditions Favorable Relative Price Conditions Concrete prices relative to steel/asphalt Concrete prices relative to steel/asphalt Material substitution in design Material substitution in design Cyclical Recovery Cyclical Recovery Larger, more cement intensive projects typically associated with economic recovery Larger, more cement intensive projects typically associated with economic recovery Construction Mix Construction Mix Outlook favors nonresidential and public construction with typically higher cement intensity Outlook favors nonresidential and public construction with typically higher cement intensity Code Changes/Green Building Code Changes/Green Building Fiscal Healing Fiscal Healing

Portland Cement Consumption Million Metric Tons Year % % % % % %

Import Mix Shift 5.3%Mexico 20.9%Latin America 19.7%Europe 21.1%Canada 29.5%Asia %Other 6.5% 17.4% 18.5% 16.0% 36.0% % 6.3% 11.1% 13.0% 13.1% 55.3% %

Announced Capacity Increases (Million Metric Tons) Net Expansion MMT $5.0 Billion

Looking Forward Tight market conditions dramatically reduced Tight market conditions dramatically reduced Characterized by high operating rates Characterized by high operating rates Continued growth in Blended Cements Continued growth in Blended Cements Inventories lean and well managed Inventories lean and well managed Major expansion does not materialize until 2008 Major expansion does not materialize until 2008

U.S. Summary Slowing Economic Growth Slowing Economic Growth Rising Inflation, Interest Rates, Energy Prices, Slower Job Creation Rising Inflation, Interest Rates, Energy Prices, Slower Job Creation Construction Market Flattening Construction Market Flattening Residential Weak Residential Weak Slower Nonresidential & Public Recoveries Slower Nonresidential & Public Recoveries Higher Material Costs Higher Material Costs Potential for Market Contraction in 2007 Potential for Market Contraction in 2007 Cement Supply Cement Supply Tight Market Conditions Dramatically Reduced Tight Market Conditions Dramatically Reduced Add Extra Dose of Conservatism Add Extra Dose of Conservatism Prepare Contingency Plans Incorporating Downside Risks Prepare Contingency Plans Incorporating Downside Risks

Canadian Markets

Canadian Outlook Overall Performance Indicators Remain Solid Overall Performance Indicators Remain Solid Employment/Income Growth Supporting Domestic Demand Employment/Income Growth Supporting Domestic Demand The C$ will remain elevated The C$ will remain elevated - Hampering trade But + Keeping Inflation in check + Keeping interest rate increases muted Residential Construction Markets Residential Construction Markets Central provinces already weak Central provinces already weak Western provinces offer balance but also showing fatigue Western provinces offer balance but also showing fatigue Nonresidential Construction Emerging Nonresidential Construction Emerging Vacancy rates declining Vacancy rates declining Central provinces retooling to remain competitive Central provinces retooling to remain competitive Engineering Construction Engineering Construction Profits and revenue provide a means for investment Profits and revenue provide a means for investment

Oil Price Assumptions Strong International Demand Strong International Demand Japan/China/India Japan/China/India Supply/Production Disruptions Supply/Production Disruptions Middle East, Nigeria, Venezuela Middle East, Nigeria, Venezuela OPEC OPEC 2006: $65.83 (WTI - $/BBL) 2006: $65.83 (WTI - $/BBL) 2007: $ : $ : $ : $58.86

Employment Growth Thousands

Employment Growth Thousands Manufacturing Services

Economic Profile Canada Dollar Employment Mortgage Rates % %1.6%2.0% %6.9%7.2%6.7% Housing Starts Construction Spending 0.5% -0.2% 1.9% 0.9%

Canadian GDP Year-Year % Change

Canadian Construction

Residential Activity Canada

Housing Starts Thousand Units

Nonresidential Activity Canada

Construction Spending Index 1999= Residential Nonresidential Engineering

Canadian Cement Industry

Industry Profile Consumption: 9 mmt Consumption: 9 mmt Clinker Capacity: 16.2 mmt (+1.2%) Clinker Capacity: 16.2 mmt (+1.2%) 16 Plants/8 Companies 16 Plants/8 Companies Production concentrated in Ontario/Quebec Production concentrated in Ontario/Quebec Average Kiln Capacity up 33% in last ten years Average Kiln Capacity up 33% in last ten years Grinding Capacity: 17.5 mmt (-2.6%) Grinding Capacity: 17.5 mmt (-2.6%) Imports - Clinker Imports - Clinker 50-90,000 Over last three years 50-90,000 Over last three years Mostly Turkish into Quebec Mostly Turkish into Quebec Imports - Cement Imports - Cement 650,000/Year Average (9% of Consumption) 650,000/Year Average (9% of Consumption) 90% from the U.S. mostly into Ontario/Alberta/BC 90% from the U.S. mostly into Ontario/Alberta/BC

Portland Consumption Year-Year % Change %5.0% 1.2%1.7%

Portland Consumption Million Metric Tonnes 5.1% 5.0% 1.2%

Cement & Clinker Exports Million Metric Tonnes % to the U.S. 99% to the U.S. Others Others Middle East Middle East Asia Asia Europe Europe South America South America 06

Cement Capacity Utilization Percent

SCM’s Million Metric Tonnes

Cement Intensity Competitive price position vs. other building materials Competitive price position vs. other building materials Composition of construction Composition of construction Green environment Green environment Product Product Tonnes/ Million 2005$

Competitive Materials

Atlantic Region

Employment Growth Atlantics Thousands % 0.2% 0.5%

Employment Growth Atlantics 1.3% Services 10.4% 0.1%Construction 3.4%2.3% Manufacturing % 0.1% - 8.2% % 5.5% - 1.5% %1.4%Total 0.2% 0.5%

Net Migration Atlantics Thousands

Population Growth Atlantics Year-Year % Change

Real Economic Growth Atlantics Year-Year % Change

Housing Starts Atlantics 3 Month Moving Average Thousand Units

Residential Permits Atlantics

Housing Starts Atlantics Thousand Units

Nonresidential Permits Atlantics

Construction Spending Atlantics %6.2%Total -0.6% 0.4% -4.8%3.4%Residential -5.3% - 2.9% 0.5% 12.1%Nonresidential 1.0% 1.5% 5.9%7.1%Engineering 3.1%

Atlantic Region Cement

Market Profile Atlantics Consumption:.577 mmt (2006) Consumption:.577 mmt (2006) Clinker Capacity:.520 mmt (2004) Clinker Capacity:.520 mmt (2004) 1 Plant (Brookfield) 1 Plant (Brookfield) Grinding Capacity:.616 mmt (2004) Grinding Capacity:.616 mmt (2004) Cement Imports ( ) Cement Imports ( ) ,000 t/Y (2006 E = 10,000) ,000 t/Y (2006 E = 10,000) Mostly from U.S. into N.B. Mostly from U.S. into N.B. Cement Exports ( Average) Cement Exports ( Average) ,000 t/Y (2006 E = 25,000) ,000 t/Y (2006 E = 25,000) From N.S. to Denmark/Venezuela From N.S. to Denmark/Venezuela

Key Markets Exposure Atlantics Cement Consumption as % of Total Provincial Cement Consumption Residential: 29% 33% Residential: 29% 33% Nonresidential: 28% 30% Nonresidential: 28% 30% Industrial: 7% 8% Industrial: 7% 8% Commercial: 14% 16% Commercial: 14% 16% Institutional: 7% 6% Institutional: 7% 6% Engineering: 37% 33% Engineering: 37% 33% Transportation: 19% 21% Transportation: 19% 21% Other: 17%12% Other: 17%12% National

Portland Cement Consumption Atlantics Year-Year % Change % -4.6% 0.3%6.5%

Concrete Products Markets Atlantics 24,56525,872Precast 17,98217,381Concrete Pipe 8,19812,441Brick & Block ,346 20,681 7, Tonnes 21,976 26,075 7, Source: PCA Market Research – Consumption by User Group

Imports Atlantics 12,8788,358Portland 3041,283White 00 Clinker , Tonnes Other* 2,5592,667 37,172 15,74112,308 59,688 7, YTD 2,044 10,250

Residential Cement Atlantics Thousand Tonnes

Nonresidential Cement Atlantics Thousand Tonnes

Engineering Cement Atlantics Thousand Tonnes

Portland Cement Consumption Atlantics Million Metric Tonnes %-4.6%0.3%

Provincial Outlook Atlantics Residential Residential Out-migration/interest rates dampen activity Out-migration/interest rates dampen activity Nonresidential Nonresidential Small dollars chasing growth Small dollars chasing growth Health/Education sectors carry upside potential Health/Education sectors carry upside potential Engineering contributes moderately Engineering contributes moderately Fiscal balance sheet softer Fiscal balance sheet softer Mega-projects on the wind down Mega-projects on the wind down Dollar pressing tourism Dollar pressing tourism Tar Ponds project begins to unfold Tar Ponds project begins to unfold

Construction & Cement Outlook ACI/APRMCA 2007 Joint AGM February 16, 2007 St. John, NB David E. Czechowski - Sr. Canadian Economist Economic Research Portland Cement Association