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 PricesOil Prices

Is the recent rundown sustainable?Is the recent rundown sustainable?Where is International Demand/Disruptions/OPEC?Where is International Demand/Disruptions/OPEC?

Inflation Inflation Will it subside enough to satisfy the Fed?Will it subside enough to satisfy the Fed?

Interest RatesInterest RatesResumption in increases? Resumption in increases?

Housing DeclineHousing DeclineHard or Soft landing?Hard or Soft landing?

Job CreationJob Creation

(Change from prior month)

Nonfarm Employment

Job Growth

2005: +2.03 Million

2006: +1.91 Million

2007: +1.60 Million

-400

-200

0

200

400

600Thousands

00 01 02 03 04 05 06 07

Consumer Under Pressure

Pay Increase Averages 3.5%.Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%Health Insurance Premiums Rise 7%-11% State and Local Property Taxes RiseState and Local Property Taxes Rise

Home appreciated reassessmentHome appreciated reassessment

Energy Prices Take a BiteEnergy Prices Take a Bite

Interest Rates Rising in Context of Record Interest Rates Rising in Context of Record DebtDebt

Tapping Home Equity Bank Not as AttractiveTapping Home Equity Bank Not as Attractive Slowdown in Job CreationSlowdown in Job Creation

Consumer Confidence FlatConsumer Confidence Flat

Real InvestmentNonresidential Structures & Equipment

-20

-10

0

10

20

30

40

Qtr/Qtr% Change

90 92 94 96 98 00 02 04 06

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

--------2005---------- --------2006-------- --------2007-------

3.5%

Qtr-Qtr Annual Growth Rate

--------2008--------

3.1% 2.6% 2.4%

Risks On Downside

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Changing Composition of Construction Spending

Growth Leader: ResidentialGrowth Leader: Residential Low Interest RatesLow Interest Rates

PublicPublic State Tax Revenues Hurt by State Tax Revenues Hurt by

Anemic Economic GrowthAnemic Economic Growth

Growth Laggard: NonresidentialGrowth Laggard: Nonresidential Weak EconomyWeak Economy

Growth Leader : NonresidentialGrowth Leader : Nonresidential Steady EconomySteady Economy

PublicPublic State Tax Revenues Recovery State Tax Revenues Recovery

Due to Economic GrowthDue to Economic Growth

Growth Laggard : ResidentialGrowth Laggard : Residential Rising Interest RatesRising Interest Rates

2001-2005 2006-2010Low Interest Rates

Weak Economy

Rising Interest Rates

Steady Economy

Housing Activity More Than Low Rates…

The Cyclical Upside: 2001 - 2005The Cyclical Upside: 2001 - 2005

Low mortgage ratesLow mortgage rates Emergence of exotic mortgagesEmergence of exotic mortgages

Easy credit conditionsEasy credit conditions Speculators add froth to the marketSpeculators add froth to the market

The Cyclical Downside: 2006 - 2009The Cyclical Downside: 2006 - 2009 Mortgage rates will riseMortgage rates will rise

Inventory DrawInventory Draw Exotic mortgages losing favorExotic mortgages losing favor

Defaults/delinquencies deteriorate credit quality and tighten conditionsDefaults/delinquencies deteriorate credit quality and tighten conditions

Speculators reduced/disappear in lower appreciation rate environmentSpeculators 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

50,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Period of Emerging Period of Emerging TroubleTrouble

0.5

1.0

1.5

2.0

MillionUnits

98 99 00 01 02 03 04 05 06 07 08 09

Single Family Starts

Nonresidential Construction

Underlying nonresidential Underlying nonresidential drivers improving drivers improving

Despite gains for 2006, Despite gains for 2006, most markets weak from most markets weak from historical perspectivehistorical perspective

Slower growth outlook Slower growth outlook depresses expected ROI depresses expected ROI and tempers recoveryand tempers recovery

High material costs reduce High material costs reduce

growth growth

100

130

160

190

220

Billions1996$

95 97 99 01 03 05 06 07 08 09

Public Construction

93% of public 93% of public construction performed construction performed at state/local levelat state/local level

State/Local fiscal State/Local fiscal

problems fadingproblems fading

Revenue growth Revenue growth improves with economy improves with economy and job growthand job growth

Pent-up demand releasedPent-up demand released Highway Bill adds Highway Bill adds

strengthstrength -80

-40

0

40

80

$Billion

89 91 93 95 97 99 01 03 05 07

State & Local Government Surplus

Public Construction

120

140

160

180

200

220

Billions1996$

93 95 97 99 01 03 05 07 09

U.S. Construction Outlook

500

600

700

800

900

Billions1996$

93 95 97 99 01 03 05 06 07 08 09

Conclusions

Residential Easement ModestResidential Easement Modest Mortgage Rate Increases SubduedMortgage Rate Increases Subdued Affordability ImprovesAffordability Improves

Nonresidential RecoveryNonresidential Recovery Turning Points Already AchievedTurning Points Already Achieved Still Weak from a Historical PerspectiveStill Weak from a Historical Perspective Recovery within Sectors Differ Recovery within Sectors Differ

Retail/Hotel/Industrial LeadRetail/Hotel/Industrial Lead Institutional/Office LagInstitutional/Office Lag

Public Waiting In WingsPublic Waiting In Wings State Fiscal RecoveryState Fiscal Recovery Pent-up DemandPent-up Demand SAFETEASAFETEA

U.S. Cement Outlook

Portland Cement Consumption

-20

-10

0

10

20

30

Year-Year

% Change

02 03 04 05 06 07

Harsh Winter

Mild Winter

Mild Winter

YTD 0.9%

No Shortage Tight Supplies

Cement Supply Survey Summer 2006

Spot Tight Supplies

Cement Intensity

Favorable Relative Price ConditionsFavorable Relative Price Conditions Concrete prices relative to steel/asphalt Concrete prices relative to steel/asphalt Material substitution in designMaterial substitution in design

Cyclical RecoveryCyclical Recovery Larger, more cement intensive projects Larger, more cement intensive projects

typically associated with economic recoverytypically associated with economic recovery

Construction MixConstruction Mix Outlook favors nonresidential and public Outlook favors nonresidential and public

construction with typically higher cement construction with typically higher cement intensityintensity

Code Changes/Green BuildingCode Changes/Green Building Fiscal HealingFiscal Healing

Portland Cement Consumption

60

70

80

90

100

110

120

130

140

MillionMetric Tons

89 91 93 95 97 99 01 03 05 07 09

Year

2004 6.8%

2005 5.6%

2006 0.6%

2007 0.3%

2008 2.9%

2009 3.6%

Import Mix Shift

5.3%Mexico

20.9%Latin America

19.7%Europe

21.1%Canada

29.5%Asia

2004

3.6%Other

6.5%

17.4%

18.5%

16.0%

36.0%

2005

5.5%

6.3%

11.1%

13.0%

13.1%

55.3%

2006

1.2%

Announced Capacity Increases(Million Metric Tons)

-1

0

1

2

3

4

5

6

7

8

96 98 00 02 04 05 06 07 08 09 10

Net Expansion 2006-2010

22.5 MMT

$5.0 Billion

Looking Forward

Tight market conditions dramatically reducedTight market conditions dramatically reduced

Characterized by high operating ratesCharacterized by high operating rates

Continued growth in Blended CementsContinued growth in Blended Cements

Inventories lean and well managedInventories lean and well managed

Major expansion does not materialize until 2008Major expansion does not materialize until 2008

U.S. Summary

Slowing Economic GrowthSlowing Economic Growth Rising Inflation, Interest Rates, Energy Prices, Slower Job CreationRising Inflation, Interest Rates, Energy Prices, Slower Job Creation

Construction Market FlatteningConstruction Market Flattening Residential Weak Residential Weak Slower Nonresidential & Public RecoveriesSlower Nonresidential & Public Recoveries Higher Material CostsHigher Material Costs Potential for Market Contraction in 2007Potential for Market Contraction in 2007

Cement SupplyCement Supply

Tight Market Conditions Dramatically ReducedTight Market Conditions Dramatically Reduced

Add Extra Dose of ConservatismAdd Extra Dose of Conservatism Prepare Contingency Plans Incorporating Downside RisksPrepare Contingency Plans Incorporating Downside Risks

Canadian Markets

Canadian Outlook

Overall Performance Indicators Remain SolidOverall Performance Indicators Remain Solid Employment/Income Growth Supporting Domestic DemandEmployment/Income Growth Supporting Domestic Demand The C$ will remain elevated The C$ will remain elevated

- Hampering tradeHampering tradeButBut+ Keeping Inflation in checkKeeping Inflation in check+ Keeping interest rate increases mutedKeeping interest rate increases muted

Residential Construction MarketsResidential Construction Markets Central provinces already weakCentral provinces already weak Western provinces offer balance but also showing fatigueWestern provinces offer balance but also showing fatigue

Nonresidential Construction EmergingNonresidential Construction Emerging Vacancy rates decliningVacancy rates declining Central provinces retooling to remain competitiveCentral provinces retooling to remain competitive

Engineering ConstructionEngineering Construction Profits and revenue provide a means for investmentProfits and revenue provide a means for investment

Oil Price Assumptions

Strong International DemandStrong International Demand Japan/China/IndiaJapan/China/India

Supply/Production DisruptionsSupply/Production Disruptions Middle East, Nigeria, VenezuelaMiddle East, Nigeria, Venezuela OPECOPEC

2006: $65.83 2006: $65.83 (WTI - $/BBL)(WTI - $/BBL)

2007: $60.302007: $60.30 2008: $58.862008: $58.86

Employment Growth

-40

0

40

80

120Thousands

03 04 05 06 07

Employment Growth

-40

0

40

80

120Thousands

03 04 05 06 07

Manufacturing

Services

Economic ProfileCanada

Dollar

Employment

Mortgage Rates

2007

1.6%

2006 20092008

1.4% 1.6%2.0%

.862.876 .848.882

7.1%6.9% 7.2%6.7%

Housing Starts 204212 205227

ConstructionSpending

0.5%-0.2% 1.9%0.9%

Canadian GDP

0

2

4

6

8

Year-Year% Change

98 99 00 01 02 03 04 05 06 07 08 09

Canadian Construction

Residential ActivityCanada

060504

12

11

10

9

8

Residential Activity - MultiplesAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

060504

12

11

10

9

8

Residential Activity - SinglesAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

060504

24

22

20

18

16

Residential Activity - TotalAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

Housing Starts

140

170

200

230

260

ThousandUnits

99 00 01 02 03 04 05 06 07 08 09

Nonresidential ActivityCanada

060504

800

600

400

200

Institutional & Governmental ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

060504

1400

1200

1000

800

600

Commercial ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

060504

500

400

300

200

Industrial ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

Construction Spending

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Index1999=1.0

99 00 01 02 03 04 05 06 07 08 09

Residential

Nonresidential

Engineering

Canadian CementIndustry

Industry Profile

Consumption: 9 mmtConsumption: 9 mmt

Clinker Capacity: 16.2 mmt (+1.2%)Clinker Capacity: 16.2 mmt (+1.2%)16 Plants/8 Companies16 Plants/8 Companies

Production concentrated in Ontario/QuebecProduction concentrated in Ontario/QuebecAverage Kiln Capacity up 33% in last ten yearsAverage Kiln Capacity up 33% in last ten years

Grinding Capacity: 17.5 mmt (-2.6%)Grinding Capacity: 17.5 mmt (-2.6%)

Imports - ClinkerImports - Clinker50-90,000 Over last three years50-90,000 Over last three yearsMostly Turkish into QuebecMostly Turkish into Quebec

Imports - CementImports - Cement650,000/Year Average (9% of Consumption)650,000/Year Average (9% of Consumption)90% from the U.S. mostly into Ontario/Alberta/BC90% from the U.S. mostly into Ontario/Alberta/BC

Portland Consumption

-10

0

10

20

30

40

Year-Year% Change

03 04 05 06 075.1% 5.0% 1.2% 1.7%

7

8

9

10

11

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Portland Consumption

MillionMetric Tonnes

5.1%5.0%

1.2%

Cement & Clinker Exports

2

4

6

8

MillionMetric Tonnes

82 85 88 91 94 97 00 03 05

99% to the U.S.99% to the U.S.OthersOthers

Middle EastMiddle East AsiaAsia EuropeEurope South AmericaSouth America

06

Cement Capacity Utilization

75

80

85

90

95Percent

95 96 97 98 99 00 01 02 03 04 05

SCM’s

0.90

1.00

1.10

1.20

1.30

1.40

MillionMetric Tonnes

00 01 02 03 04 05 06

Cement Intensity

Competitive price Competitive price position vs. other position vs. other building materialsbuilding materials

Composition of Composition of constructionconstruction

Green environment Green environment Product Product 50

55

60

65

Tonnes/Million 2005$

99 00 01 02 03 04 05 06 07 08 09

Competitive Materials

0706050403

2.00

1.75

1.50

1.25

1.00

0.75

Competitive Materials Cost Indices - Canada(January 2003=1.0)

Source: Statistics Canada

Steel

Lumber

Concrete

Asphalt Bitumen*

Atlantic Region

Employment Growth Atlantics

-10

-5

0

5

10

15

20Thousands

04 05 06 072.0% 0.2% 0.5%

Employment GrowthAtlantics

1.3%1.3%Services

10.4%0.1%Construction

3.4%2.3%Manufacturing

20042003

1.2%

0.1%

- 8.2%

2005

1.1%

5.5%

- 1.5%

2006

2.0%1.4%Total 0.2% 0.5%

Net MigrationAtlantics

-50

-25

0

25Thousands

99 00 01 02 03 04 05 06 07 08 09

Population GrowthAtlantics

-0.6

-0.3

0.0

0.3

0.6

Year-Year% Change

91 93 95 97 99 01 03 05 07 09

Real Economic Growth Atlantics

0

2

4

6

8

Year-Year% Change

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Housing StartsAtlantics

3 Month Moving Average

7

10

13

16

ThousandUnits

00 01 02 03 04 05 06 07

Residential PermitsAtlantics

060504

1.4

1.2

1.0

0.8

Residential Activity - TotalAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

060504

0.8

0.6

0.4

0.2

0.0

Residential Activity - MultiplesAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

060504

0.9

0.8

0.7

0.6

0.5

Residential Activity - SinglesAll Areas - Seasonally Adjusted - Units (000)

3MMA 12MMA

Housing StartsAtlantics

8

10

12

14

ThousandUnits

99 00 01 02 03 04 05 06 07 08 09

Nonresidential PermitsAtlantics

060504

100

80

60

40

20

Commercial ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

060504

50

40

30

20

10

0

Industrial ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

060504

40

30

20

10

0

Institutional & Governmental ActivityAll Areas - Seasonally Adjusted - $ Million

3MMA 12MMA

Construction SpendingAtlantics

20062005 2007 2008

-0.2%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% 3.1%

Atlantic Region Cement

Market ProfileAtlantics

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 (2003-2005)Cement Imports (2003-2005) 12 - 24,000 t/Y (200612 - 24,000 t/Y (2006EE = 10,000) = 10,000) Mostly from U.S. into N.B.Mostly from U.S. into N.B.

Cement Exports (2003-2005 Average)Cement Exports (2003-2005 Average) 9 - 50,000 t/Y (20069 - 50,000 t/Y (2006EE = 25,000) = 25,000) From N.S. to Denmark/VenezuelaFrom N.S. to Denmark/Venezuela

Key Markets ExposureAtlantics

Cement Consumption as % of Total Provincial Cement Consumption

Residential: 29% Residential: 29% 33%33%

Nonresidential: 28% Nonresidential: 28% 30%30% Industrial: 7% Industrial: 7% 8% 8% Commercial: 14% Commercial: 14% 16%16% Institutional: 7% Institutional: 7% 6% 6%

Engineering: 37%Engineering: 37% 33%33% Transportation: 19%Transportation: 19% 21%21% Other: 17%Other: 17% 12%12%

National

Portland Cement ConsumptionAtlantics

-40

0

40

80

Year-Year% Change

03 04 05 06 0710.3% -4.6% 0.3% 6.5%

Concrete Products Markets Atlantics

24,56525,872Precast

17,98217,381Concrete Pipe

8,19812,441Brick & Block

20042003

29,346

20,681

7,573

2005Tonnes

21,976

26,075

7,925

2006

Source: PCA Market Research – Consumption by User Group

ImportsAtlantics

12,8788,358Portland

3041,283White

00Clinker

20042003

21,874

642

0

2005Tonnes

Other* 2,5592,667 37,172

15,74112,308 59,688

7,903

303

0

2006YTD

2,044

10,250

Residential Cement Atlantics

50

100

150

200

250

ThousandTonnes

99 00 01 02 03 04 05 06 07 08 09

Nonresidential Cement Atlantics

100

150

200

250

ThousandTonnes

99 00 01 02 03 04 05 06 07 08 09

Engineering Cement Atlantics

140

180

220

260

300

ThousandTonnes

99 00 01 02 03 04 05 06 07 08 09

Portland Cement ConsumptionAtlantics

0.300

0.400

0.500

0.600

0.700

0.800

MillionMetric Tonnes

99 00 01 02 03 04 05 06 07 08 0910.3% -4.6% 0.3%

Provincial OutlookAtlantics

ResidentialResidential Out-migration/interest rates dampen activityOut-migration/interest rates dampen activity

NonresidentialNonresidential Small dollars chasing growthSmall dollars chasing growth Health/Education sectors carry upside potentialHealth/Education sectors carry upside potential

Engineering contributes moderatelyEngineering contributes moderately Fiscal balance sheet softerFiscal balance sheet softer

Mega-projects on the wind downMega-projects on the wind down Dollar pressing tourismDollar pressing tourism

Tar Ponds project begins to unfoldTar 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