AGCJanuary 2018

US Construction:Long Road Ahead

Manuel BalmasedaCEMEX Chief Economist

- 2 -

-6.5

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

Jan-

73

Jan-

76

Jan-

79

Jan-

82

Jan-

85

Jan-

88

Jan-

91

Jan-

94

Jan-

97

Jan-

00

Jan-

03

Jan-

06

Jan-

09

Jan-

12

Jan-

15

Jan-

18

US economy: above-trend growth

• Positive global outlook

• Solid fundamentals for domestic demand (job creation, household and corporate balance sheets)

• Impact of the tax reform

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Dec

-14

Feb-

15A

pr-1

5Ju

n-15

Aug

-15

Oct

-15

Dec

-15

Feb-

16A

pr-1

6Ju

n-16

Aug

-16

Oct

-16

Dec

-16

Feb-

17A

pr-1

7Ju

n-17

Aug

-17

Oct

-17

Dec

-17

US Activity Indicator(MA3, % yoy)

Source: CX-Economics

- 3 -

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

72 77 82 87 92 97 02 07 12 17

Source: Census and CEMEX. Note: I&C includes lodging, office, commercial and industrial. Infrastructure includes civil works (Highways and Streets, Waste/Water , Utilities, etc) and other buildings (health care, educational, administrative, etc.)

• Construction/GDP ratio decreased 10 points since the early 70s (service oriented economy, productivity).

Total

Infrastructure

Housing

Private Non-Residential

Infras.

H

I&C

Tot.

3.3

3.8

2.3

9.02.4

2.2

1.3

6.0

6.3

5.8

4.4

15.8

Declining share of construction industry

Construction (% GDP)

• All sectors contributed negatively.

• Infrastructure has the deepest decline.

- 4 -Source: BLS

Construction “falling behind the times”

Productivity (Index; 1987=100)

50

75

100

125

150

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Construction

Services

Manufacturing • The adoption of technology in construction lagging other sectors

• Falling even behind labor-intensive sectors

• No productivity gains during the “boom” and loses in recessions

- 5 -

Construction rebounding from a very low base post Great Recession

Source: CX

50

60

70

80

90

100

110

120

-19 -14 -9 -4 1 6 11 16 21 26 31 36 41 4650

60

70

80

90

100

110

120

-19 -14 -9 -4 1 6 11 16 21 26 31 36 41 46

GDP

Construction

Construction

Total

GDP and Construction since the Great Recession(Peak=100)

Employment (Peak=100)

Quarters Quarters

- 16 -

Industrial & Commercial

Infrastructure

Housing

6.6

2017 growth (%)

0.9

0.4

- 4.2

Construction during the Great Recession(Peak=100)

Quarters

Total

Housing

PNR

Infras.

Infrastructure: all talk, no business

Source: CX

20

30

40

50

60

70

80

90

100

110

120

-19 -14 -9 -4 1 6 11 16 21 26 31 36 41 46

- 17 -

Infrastructure: clearly not a priority

Infrastructure Color Map

Assessment Looking forward

Disappointing Gaining some traction

Tax reform? Trump’s plan?Priority only on paper, and not even that

2018Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

20172016

-4.5 -1.0 2.1 4.3 1.2 -2.7 -1.8 -2.8 -5.2 -3.7 -7.1 -6.9 -5.0 -4.8 -2.6 -3.5

-0.7 0.5 0.4 -0.4 -1.5 -0.2 1.4 0.5 1.1 2.8 3.5 2.8 4.2 3.1 1.7 1.6 2.4

-1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.1 -1.1 -1.1 -1.0 -0.9 -0.8

-7.8 -1.2 4.2 6.6 -8.3 -10.7 -2.6 -2.5 -3.0 -3.8 -7.2 -6.2 -5.3 -7.4 -8.6 -8.5

4.6 5.6 3.3 3.9 2.1 3.8 6.6 5.3 4.7 4.1 4.8 4.6 4.4 3.5 3.9 1.7

-3.7 -1.0 1.5 3.7 3.8 -0.5 -1.6 -2.9 -5.8 -3.7 -7.0 -7.1 -4.9 -4.2 -1.1 -2.2

Census constr.Employment

State fiscal bal.Census constr.Employment

Census constr.

Total

H&S

Other

- 18 -

Infrastructure: Civil engineering underperforming

-20%

-15%

-10%

-5%

0%

5%

H&S

Util

ities

W&

W M

gmt.

Educ

.

Heal

th C

are

Adm

inis

trat

ive

Infrastructure segments(YTD growth)

Educational, Health care and Administrative refers to building construction spending. Source: CX

Infrastructure segments(Shares 2017)

19%

26%

21%

8%

10%

3%

13%

H&S

Utilities

Educ.

W & W

Health care

Administrative

Rest

- 19 -

The old well-known story: Reality bites

Increasing gap

Funding

Entitlement spending

- 20 -

Where do we come from?: Reality bites

Increasing gap

$ 1.4 T by 2025(Gap overall infrastructure)

$808.2 B backlog

(Highways and Bridges)

~ $100 B (0.5% of GDP) annually by 2035

(overall infrastructure)

- 21 -

Where do we come from?: Reality bites

Entitlement spending

State and Local Direct General Spending(by functional category, 1977-2015)

Source: Urban Institute based on Bureau of the Census data, Survey of State and Local Government Finance, 1977-2015.

- 22 -

WA: 31

OR: 10

CA: 37

MT: 37

ID: 16

NV: 14

UT: 19

AZ: 12NM: 25

CO: 22

WY: 8

ND: 10

SD: 11

NE: 5

KS: 13

OK: 30

TX: 18 LA: 24

AR: 18

MO: 24

IA: 19

MN: 14

WI: 42

IL: 19

MS: 26AL: 11 GA: 11

FL: 9

SC: 14

NC: 12TN: 6

KY: 7VI: 21

WV: 29

OH: 15IN: 15

MI: 37

PN: 29

MD: 22

NJ: 37

NY: 29

ME: 18VT: 25

NH: 7MA: 40

RI: 40CT: 44

DE: 19

Very bad quality (>31)

Defficient quality (11% to 20%)

Good quality (< 10%)

Bad quality (21% to 30%)

Road Quality in 2016 (% of Roads in Poor/Mediocre Condition)

Source: CX based on US News data

Few States have an appropriate road quality

Entitlement spending

Nation: 20%

- 23 -

AL

AK

AZ

AR

CA

CO

CT

DE

FLGA

HI

ID

IL

IN

IA

KS

KY

LA

ME

MD

MA

MI

MN

MSMO

MT

NE

NV

NH

NJ

NM

NY

NCND

OH

OK

OR

PA

RI

SC

SD

TN

TXUT

VT

VA

WAWV

WI

WY

US

0

5

10

15

20

25

30

35

40

45

50

0% 2% 4% 6% 8% 10% 12% 14% 16%

Road Quality and share of H&S spending

% of Highways spending over total spending (2015)

% o

f Roa

ds in

Poo

r/Med

iocr

e C

ondi

tion

(201

6)

Source: CEMEX using US News and BEA data

Entitlement spending

A few States with high road quality: a matter of priorities

- 24 -

Where do we go?: No positive prospects in the short run

FAST Act funding($ Billion of 2015)

Source: CX estimates

Funding

40

41

41

42

42

43

43

2015 2016 2017 2018 2019 2020

1%

TIFIA Projects Authorized(Million $)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2012 2013 2014 2015 2016 2017

- 25 -

Crowding in

Trumps’ Plan: too good to be true

• Ambitious: too much crowding in (only 200 B$ from Federal spending).

• State cannibalization plays a key role.

• Timeline: Impact not felt before 2019 if approved (Congress, planning, contract award process around 18 months).

1 T$ to be spent in 10 years on paper

To double construction in a decade

• Cement industry potential gains much larger (H&S weight in construction: 8%; in cement: 30%).

Source: CX

Can

niba

lizat

ion

Extra construction growth per annum in the period 18-22 due to the Plan (%)

Full NoneMid

80%

None

30%

5.0 1.02.5

3.5 0.71.7

1.0 0.20.5

Cannibalization was around 30% during SAFETEA LU (05-09) and 80% during ARRA (09-13)

Funding

- 26 -

Tax reform?

Capex Hiring Buybacks/dividends Wages

?

- 27 -

Average = 26%

Beverage (Soft) (23.5%)

Aerospace/ Defense(23.2%)

Real Estate (General/ Diversified)

(22.3%)

Semiconductors (18.9%)

Drugs (Pharmaceutical)

(18.8%)

Healthcare Products(16.5%)

Computer Services(15.6%)

Auto & Truck(12.7%)

Paper & Forest Products(12.6%)

Hotel & Gaming(12.1%)

Chemicals (diversified)

(11.6%)

Oil & Gas (integrated)

(8.0%)

Oil & Gas (production & exploration)

(7.1%)

REITs (2.2%)

Coal and Related Energy (0.7%)

Telecom (wireless)(37.7%)

Trucking(37.5%)

Cable TV(37.2%)

Transportation (Railroads)

(35.9%)

Business & Consumer Svcs.

(35.5%)

Telecom Services(34.8%)

Homebuilding(34.4%)

Retail(34.2%)

Engineering & Construction

(33.9%)

Financial Services (Nonbank/ insurance)

(31.8%)

Office Equipment & Services(31.3%)

Brokerage & Investment Banking

(30.6%)

Bank (money center)

(30.2%)

Utility (general)(30.1%)

Steel(27.6%)

Effective Tax Rates for Money-Making Companies, by Industry

Source: NYU Stern School of Business

HighTax

LowTax

Effe

ctiv

e Ta

x R

ate

27

Tax reform?

- 28 -

Reconstruction works?

Evolution of daily cement demand

US Texas

Florida Puerto Rico

-5%

0%

5%

10%

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

-10%

0%

10%

20%

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

-25%

-15%

-5%

5%

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

-70%

-40%

-10%

20%

Jan-

17

Feb-

17

Mar

-17

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec

-17

- 29 -

Reconstruction works? Puerto Rico in the dark

- 30 -

WA: 1.1

OR: 14.2

CA: 9.7

MT: 1

ID: 1.3

NV: 0.6

UT: 11.3

AZ: 10NM: 20.2

CO: 8.5

WY: 14.2

ND: -26.1

SD: 7.5

NE: 0.7

KS: -5.4

OK: 6.3

TX: 4.7 LA: -9

AR: -3.4

MO: 1.3

IA: 3.8

MN: 0.5

WI: -5.3

IL: -6.3

MS: -7.2AL: 3.1 GA: 3.6

FL: 0.2

SC: -1.9

NC: 3TN: 1.9

KY: -4.1VI: 3.7

WV: 14.4

OH: -3.3IN: 6.9

MI: 1.4

PN: 2.6

MD: -0.3

NJ: 0.4

NY: 3.4

ME: 3.1VT: 2.3

NH: 6.3MA: -2.1

RI: 6CT: -3.1

DE: -7.8

Stagnation (-2% / +2%)

Strong Decline ( < -5%)

Strong growth ( > +5%)

Growth (+2% / +5%)

Decline (-5% / -2%)

US: 2.4

Cross-State diversity

- 31 -

0

50

100

150

200

250

300

Hous

ing

PNR

H&S

Oth

erPu

blic

Tota

l 202

2

Infrastructure: Mañana, mañana, …

Construction increase 17-22 (B$)

Source: CX

CAGR: 3.7%

39% 22% 8% 31%Weight

AGCJanuary 2018

US Construction:Long Road Ahead

Manuel BalmasedaCEMEX Chief Economist