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Cement Outlook
Ed Sullivan, Chief Economist PCA
IFEBPFebruary 2012
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009
Economic Outlook
Synchronized Recovery Theory
Incremental Demand Gains
Job Gains
Sentiment Gains
Lending Standards Ease & Hiring Accelerates
Heals Structural Restraints In the context of
moderating productivity
Gains Leads to:
Sentiment includes
Consumer, Business &
Banks:
Defaults & perceived
lending risks decline
Job creation determines how
quickly the recovery cycle spins.
False Hopes: Net Job CreationAnnualized Net Job Creation
Jan 20
05
Jun 20
05
Nov 20
05
Apr 2
006
Sep 2
006
Feb 2
007
Jul 20
07
Dec 20
07
May 20
08
Oct 20
08
Mar 20
09
Aug 2
009
Jan 20
10
Jun 20
10
Nov 20
10
Apr 2
011
-12000-10000-8000-6000-4000-2000
02000400060008000
3.7 Million Annualized 3 month Moving Average
2.7 Million Annualized 3 month Moving Average
Employment OutlookAnnual Change, Thousands Employed
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-6000-5000-4000-3000-2000-1000
0100020003000
Source: BLS
Recession Recoveries: 3 Years Following, Annual Average1991: 3.08 Million, 2001: 2.22 Million, Current: 1.35 Million
Potential Upside Risk
Real GDP OutlookAnnualized Growth
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
2011 Q2
2011 Q3
2011 Q4
2012 Q1
2012 Q2
2012 Q3
2012 Q4
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%
Housing Recovery
Ingredients for a Starts Recovery
Inventory no higher than 5
months supplyPrice stability
Carry costs erode expected ROI.
Weaker the price environment…lowers the months’ supply
trigger point.
Homebuilders Expected ROI
Foreclosures Accelerate
Foreclosure Impacts
Add to Inventory
Depress Prices
2.5-3.0 MillionForeclosures in 2009-
2011 annually.
Nearly 1 Million Bank possessions annually.
Depressed Homebuilder
ROI
Adds supply.
Bank owned properties discounted.
Pressures new home prices.
Longer carry costs.
Lower revenues.
Erodes expected ROI.
Delays recovery in starts.
The Residential Recovery ProcessMortgage Resets
Working Through Structural Repair of
Housing Market Will Take Time Before Impacting
Housing Starts.
Foreclosures
Bank Possessions Shadow Inventories
Heightened Inventories
Inventory Burn Off
Price Stability
Starts Recovery
Single Family Sales Outlook
Thousands of Units
2003 2004 2004 2005 2006 2007 2008 2009 2010 2011 20122000
3000
4000
5000
6000
7000
8000
Single Family Months Supply
Thousands of Units
2003 2004 2004 2005 2006 2007 2008 2009 2010 2011 20120
2
4
6
8
10
12
Desired Month’s Supply
Single Family Home Price Outlook
Y-O-Y Percent Change
2003 2004 2004 2005 2006 2007 2008 2009 2010 2011 2012-20%-15%-10%-5%0%5%
10%15%20%
Single Family Upside Risk?Single Family Starts Projections ComparisonThousand Starts
2011 2012 2013
PCA 421 443 567Mortgage Bankers Association 420 474 619NAHB 424 495 723National Association of Realtors 416 480 ----
Other Associations’ Average 420 483 671Tons Per Start 19.2 19.2 19.2Upside Risk (000 Tons) --- 768 1,997
429
Nonresidential Drag
Nonresidential Construction
Real 1996 PIP $
2003 2003 2004 2005 2006 2007 2008 2009 2010 2010 2011 $40,000 $60,000 $80,000
$100,000 $120,000 $140,000 $160,000 $180,000 $200,000
-50%
Source: Dept of Commerce, PCA
Upside:Public Utilities, Farm,
Retail, Industrial
Nonresidential Conclusions No longer a significant drag on construction activity.
Large imbalances exist in before a positive NOI materializes
Slow job growth implies slow healing process
Credit environment hostile.
Conditions for positive ROI years off.
Not a significant contributor to cement consumption growth near term.
Office Buildings: Recovery Process
New Office Hiring
Vacancy Rates
Decline
Leasing Rates
Stabilize
Credit Troubles Ease
Asset Prices Firm
1/5 of all jobs in the office.
After reaching threshold of roughly 14% vacancy rate
Defaults & perceived
lending risks decline
Leads to a recovery in
office construction.
Office EmploymentThousands Employed
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
25,000
26,000
27,000
28,000
29,000
30,000
31,000Vacancy Rate:
12.7%
Vacancy Rate: 18.3%
Vacancy Rate: 11.3%
Source: BLS
Office Building ValuationProperty Value Index, 2000=100
50
70
90
110
130
150
170
190
Source: Moody’s
-36%
REIT OfficeDow Jones REIT Index, Total Return, 1990=100
2003200320042005200520062007200820082009201020100
200
400
600
800
1,000
1,200
-69.9%
Source: Dow Jones REIT Index
Recaptured 70%
Public Recovery
State Deficits $ Real
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-200,000,000
-100,000,000
0
100,000,000
200,000,000
300,000,000
Source: NIPI Data
National Estimates: States Do Not Heal in a Synchronized Fashion
ARRA Sterilization: State SpendingChange in Spending, Real Million 1996$
2009 2010-3000
-2000
-1000
0
1000
2000
3000
4000
ARRA $ ARRA $
State $ State $
76% Sterilization
43% Sterilization
ARRA Sterilization: State SpendingChange in Spending, Real Million 1996$
2009 2010 2011-4000-3000-2000-1000
010002000300040005000
ARRA $ ARRA $
State $ State $
Increase In State Spending Reduces
Adverse Impact
ARRA $
State $
Discretionary State Highway Cement Consumption Thousand Metric Tons
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
02,0004,0006,0008,000
10,00012,00014,00016,00018,00020,000
Highway Bill Cement Consumption ProjectionsSpring Versus Summer Assumptions
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000 Spring Forecast
Fall Forecast
The Outlook
Portland Cement Consumption Thousand Metric Tons
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
450
20,450
40,450
60,450
80,450
100,450
120,450
140,450 Chart Title
Portland Cement Capacity Utilization Production as Percent of Capacity
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160%
20%
40%
60%
80%
100%
120%
Beyond the Crisis
Economic Outlook: Medium Term Turbulence
Unintended Consequences: Past policies have a payback. Fiscal/Monetary
Inflation takes hold as capacity excesses are diminished. Weak dollar sustained Global Synchronized Growth: Commodity prices rise.
Improves concrete’s competitive position. Interest rates rise.
Inflation premiums, weaker dollar, high foreign ownership of debt
Taxes Rise Deficits must be paid for and in context of weaker dollar.
American consumer, the engine of US economic growth May distance from debt spending patterns
(lowering GDP). Baby boomers may not re-capture wealth Higher inflation erodes spending.
Debt Stimulus spending must be paid. resulting in either higher interest rates, higher taxes, and
potentially higher inflation – or all three High debt in context of weak dollar, heightens issue Fiscal austerity?
Impacts Slower growth – Is 50 basis point enough?
After the Crisis: “New Normal”: Economics
Not a typical recession recovery. Amplified by structural corrections. Amplified by possible policy errors.
Long impacts
Pent-Up Demand Being generated across all sectors.
Longer period of distress, more pent-up demand Timing and magnitude of release impacted by
economy. Regional impacts from resulting growth.
Residential, nonresidential & public synchronized – 2013 & Beyond.
Typically suggests strong cement consumption growth rates.
After the Crisis: “New Normal”: Construction
US PopulationThousands of Persons
US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.
Licensed Drivers On the RoadMillions of Licensed Drivers
150
170
190
210
230
250
270
Source: FHWA & PCA Estimates
Emerging economies, led by China/India, account for key growth drivers. Accounts for larger share of world GDP than OECD by
2014 (IMF). Exerts “new” potent demand on world markets “Synchronized” world growth returns 2013-2020.
Commodity prices (oil), freight rates, trading patterns subject to change. Impacts concrete competitiveness (oil prices = paving
position, residential ICF) Impacts sourcing decisions – high freight rates raising
import costs.
New challenges could lead to potentially new economic/political tensions.
After the Crisis: “New Normal”: Global
Initial Bid Concrete Vs Asphalt Paving CostsDollars Per Two Lane Road Mile - Urban
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000 Oman Data US Aver-
age: 13.5%
Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
Concrete
Asphalt
Oman Data US
Average: 15.3%
15% Advantage
18% Disadvantage
42% Advantage
Activist EPA Plant shut downs High compliance costs. New Source regulations!
Resumption of demand growth
Import Dependence Grows In context of weak dollar In context of emerging economy demand growth Higher freight rates.
Sourcing strategies Near term, import dependence – longer term?
After the Crisis: “New Normal”: Regulation
U.S. Supply Balance: EPA NESHAP
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
50
75
100
125
150
Million Metric Tons
Cement Consumption
Impo
rts:
54
MM
T
Cement ProductionEPA: NESHAP Impact
Fly Ash Rule Could Add 20 MMT to Cement Consumption
Cement Consumption: Long Term
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
50
70
90
110
130
150
170
190
Million Metric Tons
Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution.
Cement Outlook
Ed Sullivan, Chief Economist PCA
IFEBPFebruary 2012
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009