1. Ed Sullivan, Chief Economist PCA
Cement Outlook
Fall Committee Meetings
August 2012
Ed Sullivan, Chief Economist PCA

2. Snapshot of the Market
Cement consumption through the first half of 2012 is up 13.3% over last year.
15 consecutive months of growth.
43 states recorded first half growth over 2011 volumes.
Consumption gains have been achieved in the context of sluggish economic growth.
Real GDP = +1.75% during the first half of 2012.
Job Creation averaged 149K per month (1.8 million annualized).
Favorable weather accounts for some of these gains. .
Construction activity grew 5.8% during the first half of 2012.
Residential = +8.4%, Nonresidential = +14.4%, Public = -7.1%.
Cement intensity averaged 160 tons per million real dollars of construction spending.
First half intensity is up over 2011 levels and near past peak levels.

3. Cement Consumption: 2012 000 Metric Tons
Favorable Weather
Prior to good July (168K) numbers = 876K annualized 3 month moving average

4. Cement Consumption: 2012 000 Metric Tons
70MMT SAAR = 5%
Prior to good July (168K) numbers = 876K annualized 3 month moving average
July SAAR is the lowest since September 2011

5. Cement Consumption: 2012 000 Metric Tons
73MMT SAAR = 7%
73MMT SAAR =
Pre-weather rate +
Projected Gains from Housing Starts
Projected Gains from Nonresidential -
Projected losses from Public
Projected 10% decline in intensities
70MMT SAAR = 5%
Prior to good July (168K) numbers = 876K annualized 3 month moving average

6. Outlook for the Market
Sluggish economic growth continues through 2013, withy gradual strengthening in 2014 and beyond.
Job creation is slow this year and next before accelerating.
Structural issues that plague the construction market (foreclosures, high vacancies & depressed ROI, state budgets) are slow to heal. Growth, from trough levels, is meager until stronger economic conditions materialize in 2014.
Cement consumption growth remains modest in volume terms and is fueled by residential, nonresidential and intensity. Public weakness is offset.
By 2014, all sectors are positive and double-digit gains in consumption materialize.
Sustained growth.
By 2017 – 107 MMT, roughly 12% below past cyclical peak.

7. Portland Cement Consumption Thousand Metric Tons
Summer Forecast =
2011
2012
2013
2014
2015
2016
3.0%
6.9%
5.7%
10.6%
9.0%

8. Contribution to Growth
2011
2012
2013
2014
2015
2016
2017
Total
2,067
4,889
4,266
8,418
9,341
8,735
5,111
Residential
-1,020
2,567
2,594
4,657
4,383
3,157
1,376
- Share of Total (%)
60.8%
55.3%
46.9%
36.1%
26.9%
Nonresidential
446
1,371
824
1,623
2,689
2,769
1,469
19.3%
28.8%
31.7%
28.7%
Oil/Farm/Utilities
702
1,262
374
333
332
338
314
8.8%
4.0%
3.6%
3.9%
6.1%
Public
1,938
-312
474
1,804
2,471
1,951
11.1%
21.4%
20.7%
28.3%
38.2%

9. Economic Outlook

10. Synchronized Recovery Theory
Job creation determines how quickly the recovery cycle spins.
Incremental Demand Gains
Job Gains
Sentiment Gains
Lending Standards Ease & Hiring Accelerates
Heals Structural Restraints
In the context of moderating productivity Gains Leads to:
Defaults & perceived lending risks decline
Sentiment includes Consumer, Business & Banks:

11. Net Job Creation Annualized Net Job Creation
2.7 Million Annualized 3 month Moving Average
2.4 Million Annualized 3 month Moving Average
Prior to good July (168K) numbers = 876K annualized 3 month moving average
Current: 1.2 Million Annualized 3 month Moving Average
At this rate December 2007 Employment Levels are not reached until April 2016

12. Consumer Sentiment Composite Series
Average = 103
Prior to good July (168K) numbers = 876K annualized 3 month moving average
Current: 66 Composite

13. Economic Risks The economy is expected to grow sluggishly. 2% RGDP
A fragile economy is vulnerable to internal or external shocks.
External = Europe
Internal = Fiscal Cliff

14. The “Fiscal Cliff”
Congress passed into law the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010”.
The law extended some fiscal stimuli for two years, but required action to reduce the long-term federal debt levels.
Lacking action by congress, automatic deficit reduction measures would go into effect.
At the time, the law seemed very reasonable. The two year extension of fiscal stimuli, it was thought, would give congress enough time to reach a reasonable accord on the issue, and give the economy time to gain enough strength to endure the impact on growth associated with the fiscal drag of debt reduction.
Unfortunately, congress has yet to act, and the economy has yet to gain enough momentum to stand strongly on the private sector’s shoulders.

15. The “Fiscal Cliff”: CBO
Fiscal Deficit reduced from $1.17trillion in 2012 to $612 billion in 2013.
Revenue Adjustments:
Expiration of income & estate taxes “Bush Tax Cuts” (Dec. 31, 2012) $221 Billion
Expiration of Payroll Tax Holiday (Dec. 31, 2012) $ 95 Billion
Other Expiring Provisions (Dec. 31, 2012) $ 65 Billion
Taxes Included in Affordable Care Act “Health Care Law” $ 18 Billion
Total $ 399 Billion
Spending Adjustments:
Automatic Enforcement of Spending Cuts “Sequestration” $ 65 Billion
Expiration of extended unemployment benefits $ 26 Billion
Reduction in Medicare pay to Doctors $ 11 Billion
Other reductions $ 105 Billion
Total $ 207 Billion
Total Revenue & Spending $606 Billion or Roughly 4% of US GDP
Moody’s Calculates the revenue & s[ending cuts at $728 Billion or roughly 4.6% of US GDP

16. The “Fiscal Cliff”: Three Scenarios
Rational Congress
Avoidance
Agreement Reached Before 2013
Dysfunctional Congress
Partial Impact
First Half of 2013 Agreement
Complete Congressional Impasse
Full Adverse Impact
No Agreement Reached in 2013
Mild Adverse Impact:
Marginally higher taxes & spending cuts.
Real GDP grows near 2%.
Cement Consumption: +5%
Moderate Adverse Impact:
Automatic provisions take affect. Agreement reached only after economic distress.
Real GDP floats near zero (-0.5% to +0.5%)
Cement Consumption: -10%.
Severe Adverse Impact:
Severe recession.
Real GDP declines 2%.
Cement consumption: -15%.

17. Alternative Real GDP Outlooks Annual Percent Change
Rational Congress
Dysfunctional Congress
2013 Impasse

18. Fiscal Cliff May Already Be Impacting the Economy
Consumer Sentiment (Line)
Recession Risk (Bar)
2010
2011
2012

19. Construction Outlook

20. Construction Outlook

21. Cement Intensity Outlook

22. Residential Construction

23. Single Family Starts Outlook

24. Residential Market Outlook
Modest job creation hinders SF sales and household formation this year and next.
Robo-signings delay foreclosure activity 1st half 2012 and leads to an acceleration in 2nd half
Easing in lending standards postponed.
Improvement in month’s supply of inventory and home prices is mildly reversed.
Damaged credit, household formation, student loan debt, improved multifamily ROI, prompt starts mix to favor multifamily construction.
Housing starts show sustained increases from depressed levels.
Regional growth initially favors interior of the United States.
Depression of large markets eventually cured with job creation and fading of foreclosure issue - Pent-up demand released leading to strong starts growth.

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

26. SF Home Prices Annual Y-O-Y Percent Change
Median Price,
National Association of Realtors
Prior to good July (168K) numbers = 876K annualized 3 month moving average
Standard & Poors’ Case-Shiller

27. Months Supply Inventory Inventory/Monthly Selling Rate
Existing Homes
Prior to good July (168K) numbers = 876K annualized 3 month moving average
New Home

28. Foreclosure Pipeline Showing Cont’d Stress…
% of loans 90 days past due
% of loans in foreclosure, SA
28%
51%
Source: Mortgage Bankers Association

29. Source: Mortgage Bankers Association
Foreclosures Have Been Artificially Depressed Additional Foreclosures if Historical Rates Maintained
Source: Mortgage Bankers Association

30. Single Family Starts Thousand Starts
2011
-7.9%
2012
19.4%
2013
20.1%
2014
35.9%
2015
21.4%
2016
13.8%
2017
4.8% =

31. Total Housing Starts Thousand Starts
1.1 Million Home Overbuild =

32. Cumulative Pent-Up Demand Thousand Starts=
Upside Risk: Higher demolition rate due to unfit foreclosed properties

33. Share of SF Recovery Relative to Past Peak

34. Multi Family Starts Outlook

35. Multi Family Share of Housing Starts % Share of Starts
Prior to good July (168K) numbers = 876K annualized 3 month moving average
Years Before and After Recession Begins

36. Multifamily Starts Thousand Starts
2011
55.3%
2012
28.2%
2013
12.3%
2014
14.9%
2015
7.5%
2016
6.7%
2017
2.4% =

37. Nonresidential Construction

38. Nonresidential Outlook

39. Nonresidential Market Outlook
Nonresidential construction up 14.4% 1st half 2012.
First increase in nonresidential construction in four years.
All nonresidential sectors expected to show growth in 2012 except religious.
Large imbalances remain before a nationwide positive NOI materializes.
Vacancy rates, while improved, remain high.
Leasing rates still under pressure.
Working off imbalances is tied to job creation, either directly or indirectly.
Slower job outlook imply delayed recovery.
Conditions for positive, and full recovery, ROI still years off.
Credit environment hostile.
Energy related construction can be a very strong regional factor.

40. Office Vacancy Rate Projections
Dysfunctional Congress
Rational Congress

41. Nonresidential Cement Consumption* Thousand Metric Tons=
*Includes nonresidential and Oil, Farm & Utilities

42. Public Recovery

43. Public Outlook

44. Highways & Streets Outlook

45. Highway & Street Assessments
MAP-21 incorporated though FY 2015
Equates to SAFETEA-LU levels allowing for 1.9% inflation.
Two year commitment implies somewhat greater ability to target longer-term projects.
PCA raises cement intensity slightly.
PCA holds nominal levels constant throughout forecast horizon.
Wild card: Impact of ten-fold increase in TIFIA
ARRA dollars exhausted by mid-2013.
An estimated 300K cement tons tied to ARRA in 2013.
Near-term state highway spending based on minimum maintenance levels.
Pent-up state demand released beginning in fiscal 2015.
Facilitated by TIFIA Funds
Competitive price position improves throughout forecast horizon.
No change in states’ selection policies.

46. Roadway Cement Consumption Outlook Thousand Metric Tons
State & Local
Highway Bill =

47. Summary

48. Portland Cement Consumption Thousand Metric Tons
Summer Forecast =
2011
2012
2013
2014
2015
2016
3.0%
6.9%
5.7%
10.6%
9.0%

49. Ed Sullivan, Chief Economist PCA
Cement Outlook
Fall Committee Meetings
August 2012
Ed Sullivan, Chief Economist PCA