1. Ed Sullivan, Chief Economist PCA
Cement Outlook: 2008
Ed Sullivan, Chief Economist PCA
240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, write downs are threatening some banks solvency,, oil prices are above $120 per barrell, $4 gas is coming….and yet….

2. Introduction: Overview
The economy is in recession…and it may not be mild.
December beginning
Fiscal & Policy actions will not avert a recession.
Timing lags
Fiscal Policy not have as strong an impact on GDP as expected.
Debt, Energy, Adverse Momentum.
Lending aversion toward risk is spreading
Mortgage here
Consumer and Commercial impacts begins to emerge.
Job losses compound economic adversities.
240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, write downs are threatening some banks solvency, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, oil prices are above $120 per barrell, $4 gas is coming….and yet….

3. Key Questions
How deep will retrenchment go ?
How long will it last ?

4. Portland Cement Consumption
Declines Continue Through 2009. =
Peak (2005)-to-Trough (2009) Decline:
30 MMT (Worst in History)
(On a Percentage Basis: Equal to Recession)

5. Capacity Expansion Thousand Metric Tons Stated Capacity Expansions
Potential Increases From Specification Changes

6. Conclusion Double-digit decline in consumption with trough in 2009.
Large capacity increases magnify potential market imbalances.
Imports record large, sustained declines.
Global conditions suggest high freight rates continue.
2008: Bears most of the burden of correcting market imbalances.
Utilization Rates decline.
Materializes to a greater extent in 2009.
Days Supply Inventory remains above historical average.
Most pressure materialize in 2009.
Past Peak (2005) not realized until 2014

7. Recession is Here, and its not going to be Mild
Economic Outlook
Recession is Here, and its not going to be Mild

8. 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.

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

10. Recession: Construction Declines May not be Short or Shallow.
2006
Foreign Capital Inflows
2007
Housing
2008
Consumer
2009
Commercial
Public
Energy

11. Monetary Policy Timing Lags
Percent Change, GDP Growth Rate, Inflation
Change in Real GDP Growth Rate
Change in CPIU Inflation Rate
Peak Economic Stimulus Occurs 8-9 Months After Cut

12. Fiscal Policy Impacts Per Month
Percent Change, GDP Growth Rate
Tax Rebate Planned Impact
Tax Rebate Impact With PCA Debt Reduction Assessment

13. Unleaded Gasoline Prices
Cents Per Gallon, Department of Energy
At $4.10 Per Gallon, Wipes Out $170 Billion Fiscal Stimulus.
Every 10 Cent Increase at the Pump Takes $15 Billion Out of Consumer’s Pockets on an Annualized Basis
Since January 1st, Gasoline Prices have increased 35 cents = Equating to a $50 Billion Annualized Draw on Consumer Spending.

14. Net Job Creation Monthly Change in Total Non-Farm Employment, BLS
Economy has Shed 240,000 Jobs in Last Three Months…AND…The Recession has Just Begun.

15. Economic Growth Outlook
Percent Change, GDP Growth Rate
Tax Rebate Bump
Hard to Sell Businessmen that Recession is “technically” over in 3rd Quarter – Distress Continues Into 2009.

16. Residential Outlook
Recovery Delayed

17. Home Inventory Thousands of Homes for Sale, December
New
New
New
New
New
New
Existing
Existing
Existing
Existing
Existing
Existing
Existing Homes Account for 87% of Total Home Inventory

18. Single Family Price Trend: Existing Homes Compared to Year Ago Levels
Percent Change, Year Ago (%)
Projected
High Inventories Will Depress Prices Throughout 2008.

19. Lenders Reporting Tighter Lending Standards: Mortgages
Percent Reporting Tighter Lending Standards
Tighter Credit Will Undermine Sales Recovery
Easy Credit Period =
Sub-Prime Lending Has disappeared.

20. Nonresidential Outlook
Declines in 2008 and 2009

21. Nonresidential Construction
Nonresidential Strength
Strong Expected ROI Fostered by Strong Economic Growth
Pent-up Demand
Easy Credit Conditions
Nonresidential Softening
Expected ROI Softens With Overall Economic Slowdown
Credit Conditions Tighten
Risks and Uncertainty Grow

22. Lenders Reporting Tighter Lending Standards: Commercial
Percent Reporting Tighter Lending Standards
Medium to Large Firms
Easy Credit Period =
Small Firms
Sub-Prime Has Spilled into Commercial Credit Markets

23. Business Confidence Has Been Shaken
Percent of Firms Reporting a Positive Business Outlook, NAM Survey
Bullish Business Attitudes =

24. Slower Growth in 2008, Problems Looming Ahead
Public Outlook
Slower Growth in 2008, Problems Looming Ahead

25. States With Projected Budget Shortfalls
District of Columbia
2009 Shortfall
2010 Shortfall
No Shortfall

26. Correction is Temporary
Conclusion
Correction is Temporary

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

28. Freight Rate Trends $ Per Metric Ton
HANDYMAX 40-50,000 DWT South East Asia U.S. Gulf
HANDYSIZE 28-40,000 DWT Transatlantic U.S. East Coast/U.S. Gulf

29. Market Imbalances: After Import Reductions - Changes in Cement Consumption Tons + Capacity Expansion Tons =
2009 !

30. Conclusion Double-digit decline in consumption with trough in 2009.
Large capacity increases magnify potential market imbalances.
Imports record large, sustained declines.
Global conditions suggest high freight rates continue.
2008: Bears most of the burden of correcting market imbalances.
Utilization Rates decline.
Materializes to a greater extent in 2009.
Days Supply Inventory remains above historical average.
Most pressure materialize in 2009.
Past Peak (2005) not realized until 2014

31. Take a Step Back
Longer Term Outlook

32. Take a Step Back
Cyclical correction is temporary.

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

34. Share of U.S. Population Growth 2006-2030 (Percent Share of Total)
Note:
Total U.S. Population Growth: 65 Million Persons
47% of Total Population Growth Occurs in California, Texas and Florida
0% to 1% Share
10% +
3% to 10%
1% to 3%
Source: U.S. Bureau of Census

35. 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

36. 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.

37. Lane Miles per 1,000 Licensed Drivers
2007 Road Congestion
Lane Miles per 1,000 Licensed Drivers
Pacific
Mountain
West North Central
East North Central
South
Atlantic
East South
Central
District of Columbia
West South Central
New
England
Middle Atlantic
≤ 30 mls/1000
mls/1000
mls/1000
71 – 90 mls/1000
≥ 90 mls/1000

38. Lane Miles per 1,000 Licensed Drivers
2030 Road Congestion
Lane Miles per 1,000 Licensed Drivers
Pacific
Mountain
West North Central
East North Central
South
Atlantic
East South
Central
District of Columbia
West South Central
New
England
Middle Atlantic
≤ 30 mls/1000
mls/1000
mls/1000
71 – 90 mls/1000
≥ 90 mls/1000

39. Medicaid Pressures Build
Billions of $
Blue/Solid: Total Medicaid Spending
Red/Striped: State Medicaid Spending
34%
30%
21.5% of Total State Expenditures
25%
2032: State Medicaid Spending Exceeds One Trillion $

40. Will Medicaid “Crowd Out” Highway Spending?
Billions of Real State Spending Targeting Transportation
Transportation Spending: Constant 8% Share of Budget
Transportation Spending: Share Reduced to 7% of Budget
Transportation Spending: Share Reduced to 5% of Budget
Gasoline Tax Increases Must Be Viewed in the Context of Future Fiscal Pressures Facing States

41. 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

42. ICF & Related Systems: CO2 Savings
Metric Tons of CO2
Gains Achieved Though Energy Savings In Space Heating & Cooling
30%
25%
10% of Total Housing Starts
20%
2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

43. 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

44. Cement Consumption: Long Term
Million Metric Tons

45. Longer Term Decisions: No New Plants
Feeding the Beast
Longer Term Decisions: No New Plants

46. U.S. Supply Balance: No New Capacity Expansion Plans
Million Metric Tons
Cement Consumption
Imports
Clinker Production
Assumes No New Capacity:

47. U.S. Cement Imports: No New Capacity Expansion Plans
Million Metric Tons
2030: 84
US Domestic Capacity Expansion
New Capacity Requires Increased Import Supplement 2013

48. U.S. Supply Balance: Constant Import Share Scenario
Million Metric Tons
Cement Consumption
Clinker Production

49. Supply Challenges: 2008-2030 Import Strategy? 84 MMT.
Equates to 4 new terminals every year from
Further Capacity Expansion?
Domestic production reaches 142 MMT
Equates to one new 2 MMT plant every year from
Must weight the risks of uncertain global market conditions and high freight rates VS Increased compliance costs associated with Climate Change laws.

50. Longer Term Decisions: Climate Change Considerations
Feeding the Beast
Longer Term Decisions: Climate Change Considerations

51. Climate Change: S.2191
Establishes emission cap of 5775 MMT of CO2 by 2012 for covered sectors
Roughly 6000 MMT of CO2 currently – 3.8% reduction
Declines to 1732 MMT of CO2 by 2050
70% Reduction over program period.
Severe declines materialize after 2025.
Free Market Cap & Trade Mechanism
Initial Stages: Many suppliers of allowances & relatively few demanders.
CO2 Credit Allowance (Carbon Cost) – relatively cheap
Later Stages: Tighter Caps
More industries struggle to meet cap – implies fewer suppliers of allowances and more demanders.
CO2 Credit Allowance – relatively expensive.
84 MMT.
Equates to 4 new terminals every year from
Further Capacity Expansion?
Domestic production reaches 142 MMT
Equates to one new 2 MMT plant every year from
Must weight the risks of uncertain global market conditions and high freight rates VS Increased compliance costs associated with Climate Change laws.

52. Climate Change: S.2191
Carbon allowance price rises from as low as $36 per ton of CO2 in 2012 to $271 per ton of CO2 in 2030.
Cement industry pays this “tax” for every ton produced over its CO2 allotment.
Higher Carbon Costs result
4 million fewer jobs by 2030.
Gasoline prices near $6 per gallon by 2030.
Industrial electricity increases from roughly 6 cents per KWH to 19 cents per KWH.
Natural gas increases from $6 per Metric Cubic Foot to $26 per Metric Cubic Foot
Economy will be weaker in context of higher costs

53. Climate Change: S.2191
Where are you going to achieve such large cuts in emissions?
Residential: = 6%
Commercial = 3%
Industrial = 16%
Transportation = 33%
Electricity = 42%
Burden falls on Transportation and Electricity
Can implementation of new carbon savings technology for electricity meet these challenges according to time schedule laid out by S.2191?
If not, switch to lower carbon fuels: Natural Gas
Transportation: What happens to Highway Trust Fund?

54. Ed Sullivan, Chief Economist PCA
Cement Outlook: 2008
Ed Sullivan, Chief Economist PCA
240K jobs lost in three months, consumer sentiment already at 2001 recession lows, retail sales are weak, credit card debt has balloned, business confidence has crashed, foreclosures and defaults are accelerating, tighter lending standards have spread beyond mortgages and now include general consumer loans and commercial credit, write downs are threatening some banks solvency,, oil prices are above $120 per barrell, $4 gas is coming….and yet….