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