1. Ed Sullivan, Chief Economist PCA
Cement Outlook:
Ed Sullivan, Chief Economist PCA
IEEE

2. Introduction: Overview
State of the Industry
Road to Recovery: Short Term Outlook: 2010
Medium Term Outlook:
What the recovery looks like.
Long Term Outlook:
Growth
Supply Dynamics
Regulatory Impacts

3. State of The Industry

4. Portland Cement Consumption Thousand Metric Tons
Growth Rates
2007: - 9.6
2008:
2009:
2010:
2011:
2012:
2013:
2014:
- 54 MMT =

5. Net Capacity Expansion: Delayed
Thousand Metric Tons
The Recession has resulted in commissioning delays and potentially cancelation of expansions

6. Market Imbalances - Changes in Cement Consumption Tons + Capacity Expansion Tons=

7. Cumulative Market Imbalances Million Metric Tons=

8. Portland Cement : Inventory Conditions Days Supply Estimate
2007: 14
2008: 18
2009: 28
2010: 28
2011:20
2012: 17
2013: 17
2014: 17 =

9. Portland Cement : Utilization Rates Percent Utilization Based on Clinker Capacity=
Slow Demand Improvement, Digestion of New Capacity & Inventory Reductions Will Delay Utilization Recovery

10. The Economic Recovery Process: How & When
There is light at the end of the tunnel….it’s just a really long tunnel

11. Economic Adversity Abates Mid-2010
2006
2007
2008
2009
2010
Sub-Prime
Energy
Financial
Crisis
Labor Markets
State Deficits

12. Economic Growth & Job Creation Percent Change & Thousand Jobs%
Jobs
Net Other GDP Growth =
Net Other = All, excluding inventory changes and ARRA impacts

13. The Recovery Process
Second stimulus was needed to extend the bridge until self sustaining growth could materialize.
$150-$200 Billion was expected.
proper timing (early 2010)
Actual = $15 Billion….so far…
Is this enough, Is Timing Proper?
Large Risk & Uncertainty.

14. Point One

15. Point One: Cement Market Recovery Will Take Place in the Context of Slow Economic Growth
Recent strong GDP growth distorts the underlying fundamentals of the economy…..
While fundamentals are improving, many of the factors that gave rise to the collapse are still operating…..
Sluggish gains in GDP growth are expected…
Lacking a second stimulus…raises the risks of a sustained recovery

16. Ingredients for a “Recovery” in Concrete

17. Ingredients for a “Recovery”
This Implies continued weak consumption levels during first half of 2010
Cement Consumption: + 5.2% 2010
PCA’s 5.2% growth in 2010 translates into 4 MMT.
This “recovery” must be considered in the context of a 54 MMT peak-trough decline.
Residential
Public
Late 2010 Recovery in Starts.
ARRA continues to accelerate. Cement projects materialize 2nd half 2010

18. Portland Cement Consumption Thousand Metric Tons
- 54 MMT
+ 4 MMT =

19. Point Two

20. Point Two
Dismal business conditions will dominate for firms in construction during the first half of the year…..
Increased Stimulus impacts will be more pronounced in second half of the year…..
Net year-over-year gains in business will be meager given the context of declines
…Stimulus gains will be muted by private sector weakness….

21. Criteria For Starts Recovery

22. Residential Cement Consumption Thousand Metric Tons
MMT
Residential sector’s adverse impact on cement consumption has run its course. =
55% of Total Cement Consumption decline is attributed to residential

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

24. Foreclosures Accelerate
Foreclosure Impacts
Add to Inventory
Depressed HomebuilderROI
Depress Prices
2.8 Foreclosures in 2009.
871K Bank possessions.
Equates to one out of every 5 homes on the market.
Adds supply.
Bank owned properties discounted.
Pressures new home prices.
Longer carry costs.
Lower revenues.
Erodes expected ROI.
Delays recovery in starts.

25. Point Three

26. Upside Risk?
PCA’s projections lie below consensus estimates by a significant margin.
May imply upside risks to cement consumption…but perhaps less than suggested by the consensus.
Differences in assessments and assumptions regarding potential hurdles facing housing :
Interpretation of current optimism – recent data.
Expected labor market gains & timing.
Potential of a payback arising from federal homebuyers tax credit.
Assessments regarding foreclosure activity.
Pricing recovery for new homes.
Mortgage assessments.

27. Ingredients for a Public Recovery

28. Ingredients for a Public Cement Recovery
Highway/Street Cement Consumption
2009: 0.6 MMT
Aaa A
Aaa A
2009: -5.4 MMT
ARRA Stimulus
State Fiscal Sterilization
2010: 7.5 MMT
2010:-0.7 MMT
Outlays accelerating. Design & concrete intensive projects roll out last.
Decline in discretionary state cement consumption have been massive during past three years.

29. Point Four

30. Point Four 2010 is NOT 2009….. ARRA has yet to raise its head…..
It will…..
State fiscal conditions will continue to exert a drag on construction…..but less so that 2009.

31. ARRA-Led Recovery

32. ARRA – Weekly Highway Construction Spending - Dollars (Trend – No Seasonal Consideration)
Higher Outlays Realized in 2010
Money Released Before 2009 Peak Construction Season Ends

33. ARRA Cement &Steel Intensities Increase
2009
2010
2011
2012
Pavement Improvement & Rehab
Low / No Intensity
New Route & Widening
Moderate to High Intensity
New Bridge, Improvement & Reconstruction
High Intensity
Total ARRA Cement Consumption
0.6 MMT
7.6 MMT
7.4 MMT
0.4 MMT

34. Point Five

35. Point Five
ARRA will be a much more potent contributor to consumption in second half of 2010…..
“I haven’t seen it yet, so it ain’t never gonna come”… pessimism may be misplaced…..

36. Sterilization by State Fiscal Conditions
State Sterilization
Sterilization by State Fiscal Conditions

37. PCA’s outlook suggests only modest further erosion for 2010
Portland Cement Consumption: State Discretionary Annual Change, Thousand Metric Tons =
11 MMT Decline during
PCA’s outlook suggests only modest further erosion for 2010

38. Expected Decline in States’ General Fund - NASBO Percent Change=

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

40. Point Six

41. Point Six Any 2010 public construction outlook contains high risk…….
Not necessarily regarding ARRA……
….But on how states react to continuing fiscal crisis…..

42. After the Crisis

43. After the Crisis
Cyclical correction is temporary.

44. After the Crisis
Stimulus spending must be paid for…resulting in higher interest rates, higher taxes and potentially higher inflation….
…and…American consumer..the engine of US economic growth may show significantly different spending patterns…
…combining for the potential of slower longer term economic growth (50 basis points).
…But even with these gains…past cyclical peaks are not expected to materialize until 2015.

45. Point Seven

46. Point Seven Once recovery is in place….
And despite payback costs for stimulus…
Concrete construction could record large and sustained gains in growth.

47. After the Economic Crisis
Medium Term Outlook

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

49. Demographics: 2007-2030 Population Adds 65 Million Persons
Adds 9.1 Million School-Age Persons
Education Construction
Adds 34 Million Retirement Age Persons
Medical
Adds 31 Million Households
Housing, Retail & Infrastructure

50. Long-Term Infrastructure Outlook

51. 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.

52. Cumulative CO2 Impact From Congestion
Metric Tons of C02
2007 Urban Mobility Report:
3 Billion Gallons of Fuel Wasted Due to Congestion 30 Million Metric Tons of CO2 Emissions
Addressing Infrastructure Needs Should be Part of a Comprehensive Climate Change Policy

53. Announced New Coker Installations Cumulative: Thousands of Barrels Per Day

54. Long-Term Residential Outlook

55. Per Home, Lifetime C02 Savings ICF Home Over Frame
Co2 Metric Tons, Per Home
Total Heating & Cooling C02 Saving: 92 Tons per Home
Additional C02 Emitted by Cement Production
Conservatively Assumes 50 Year Life of Home

56. Potential “Green” Gains: ICF & Related Systems
Incremental Gains in Cement Consumption, Metric Tons
30%
25%
20%
10% of Total Housing Starts
2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

57. Long-Term Nonresidential Outlook

58. Energy: 2007-2030 Clean Energy Hydro, Wind, Nuclear
Successful clean energy policy dependent on building new sources.
New energy sources require concrete

59. Long-Term Outlook

60. 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.

61. Most Significant Threat To Domestic Cement Production in History
Regulatory Impacts
Most Significant Threat To Domestic Cement Production in History

62. Economic Growth, Policy Initiatives, Regulations
Population & Demographic Drivers
Add 60 million more persons by 2030
Add 50 million more drivers
Schools, Residential, Retail, Hospitals
Energy independence
Renewable energy
Wind, Hydro, Nuclear
CO2 Reduction
Road congestion
Residential – ICF Homes
Nonresidential
Manufacturing Base Erosion
Import Dependence, Port Infrastructure
Concrete Plays A Critical Role in Achieving Broad National Economic & Environmental Policy Objectives

63. Economic Growth, Policy Initiatives, Regulations
How Do you Reconcile These Issues with Regulatory Reform?
NESHAP Emissions
Climate Change
Leads to Dependence on Foreign Sourcing
Policy Inititiatives Captive to International Conditions

64. Long-Term Supply Assessments

65. U.S. Supply Balance: No New Capacity Expansion Plans
Million Metric Tons
Cement Consumption
Supply Gap: 67 MMT
Cement Production

66. Climate Change: Accelerated Decline of Wet Kilns
Million Metric Tons

67. U.S. Supply Balance: No New Capacity Expansion Plans, Wet Kilns Eliminated
Million Metric Tons
Cement Consumption
Supply Gap:78 MMT
Cement Production

68. Closing the Supply Gap 78 MMT = 2035 Gap 40-45 MMT Import Capacity
Two Options:
Foreign Source: Add Import Terminals
Domestic Source: Add 39 Plants (2 MMT per Plant)

69. U.S. Supply Balance: No New Capacity Expansion Plans, Wet Kilns Eliminated, NESHAP
Million Metric Tons
Cement Consumption
Supply Gap:112 MMT
Cement Production

70. Closing the Supply Gap 112 MMT = 2035 Gap 40-45 MMT Import Capacity
Two Options:
Foreign Source: Add Import Terminals
Domestic Source: Add 56 Plants (2 MMT per Plant)

71. Before Settling On Import Sourcing Strategy…
Before Settling On Import Sourcing Strategy…. - $ Per Barrel, WTI (estimated), Dry Bulk Freight Rates
Synchronized World Growth: Characterized by Emerging Middle Class in Developing Economies.
Oil
Dry Bulk Freight Rates

72. Ed Sullivan, Chief Economist PCA
Cement Outlook:
Ed Sullivan, Chief Economist PCA
IEEE