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Cement & Construction Outlook
MCA Winter Conference
February 16, 2009 Dave Zwicke, PCA Regional Economist
Overview
Economic fundamentals are deteriorating quickly.
Outlook shaped by policy actions.
Details and size of the stimulus plan are fluid and still subject to considerable change….adds risk to PCA projections.
Introduction: The Need For Stimulus…
Lacking stimulus, the economy enters a deep and long contraction GDP declines 2.7% in 2009 and another 1.5% in 2010 An additional 6 million more jobs lost and unemployment reaches 10.4% State deficits reach $79 billion in 2009, $102 billion in 2010.
Cement consumption declines 15% in 2009 followed by another 8.5% in 2010.
Single Family housing starts decline to 400,000 annually in 2009 and 2010. Significant recovery does not materialize until 2012.
Cement Consumption – U.S.
(000) Metric Tons Stimulus Peak (2005)-to-Trough Decline: No Stimulus: -52 MMT With Stimulus: -40 MMT
Construction Turning Points 1996=100 180 Residential 2006 160 140 120 100 Public 2008 80 60 1996 1998 2000 2002 Nonresidential 2008 2004 2006 2008 2010 2012
The Bottom Line
Economic outlook remains dim…and getting darker.
Adversity may continue longer than expected.
No recovery in housing until 2010 Nonresidential decline slower to materialize…longer recovery Potential of fiscal crisis at State level brewing Sharp Recovery may materialize beginning in 2011
Economic Outlook
Economic Outlook: Five Factors
Sub-Prime Financial Crisis Energy Inflation Labor Markets Mortgage Payments Credit Cards Defaults Tight Lending Standards Home Price Declines Reliance on Home Equity Gone Defaults Write-Downs Risk Aversion Tight Lending Standards Commercial, Consumer, homeowner capital access reduced Global Structural Global Realities Gasoline Prices Heating Prices Cost of Business Adds Weakness to Dollar Energy Prices Slower Economic Growth Fertilizer/Biofuels hit Ag Prices One Million Job Loss in 2008 Supply Side Costs Ingrained Expected Inflation Rises Housing Recovery Delayed Nonresidential Declines Fed Tightens Short and Long Term Interest Rates Rise State Fiscal Crisis Looming Public Declines
Housing Energy Financial Crisis Inflation Labor Markets
2006
Economic Adversity
2007 2008 2009 2010
States in Recession
VT NH NJ DE MD CT MA RI
Recession At Risk Growing Source: PCA/BLS
The Stage Has Been Set… Unemployment Rate -- % Change Year Ago = Recession Source: BLS
Employment declines … Change in payroll jobs (000) Source: BLS
Missouri Unemployment Unemployment Rate = Recession Source: BLS
Housing had been the catalyst… Units (000) Annual Growth Source: Census, S&P Case Shiller
Consumers now a major drag… Annual Percent Change
Monetary Policy Federal Funds Rate Recession Risks Prompt Fed Rate Cuts Long Recognition Lag By Fed…Forcing More Aggressive Policy Posture
Fiscal Stimulus
Impacts 2 nd half 2008 – 1 st half of 2009
$150 Billion Rebates
Expected to reduce depth and duration of recession
Fiscal policy may shorten economic downturn and accelerate recovery…but it will NOT AVERT the recession
Energy Prices may offset fiscal stimulus…
Unleaded Gas, $ Per Gallon
Every 1 Cent Increase at the Pump Takes $1 Billion Out of Consumer’s Pockets on an Annualized Basis Jan - Sep, Gasoline Prices have increased $.92 cents = Equating to a $92 Billion Annualized Draw on Consumer Spending Source: Department of Energy
Economic Growth Outlook Percent Change, GDP Growth Rate 5.00% Recession Scenario: With Stimulus 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Recession Scenario: No Stimulus 2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2012.3
Residential Construction
Cement Demand Composition: 5Y AVG U.S.
Missouri
34% 29,7% 43% 56,2% 14,1% 23%
Public Residential Nonresidential
Mortgage Rates Composite contract rate % Fed began cutting rates Easy Credit Period
Foreclosures continue to rise… % of loans 90 days past due, SA
1st 2nd 3rd
Source: Mortgage Bankers Association
Foreclosures are concentrated… Below U.S.
Near U.S.
Above U.S.
Source: Equifax, Economy.com
% of households defaulting on their 1 st mortgage, 08Q2 US: 1.8%
Home Prices will stabilize in late 2009
Existing Single Family Homes
High Inventories Will Depress Prices Into 2009
Missouri Housing Permits Units
Missouri Housing Market
Annual % Change -- Single Family Median Home Market Economy
Source: National Association of Realtors
Residential Cement Consumption
Metric Tons
Source: PCA
Nonresidential Construction
Nonresidential Construction
Nonresidential Strength in 2006-2007
Favorable ROI supported by active investment environment
Pent-up Commercial Demand
Easy Credit Conditions
Nonresidential Softening in 2008-2010
ROI Softens With Overall Economic Weakness
Credit Conditions Tightening
Risks and Uncertainty Grow
Financial Liquidity
Sub Prime
TED Spread – Difference between 3m T-Bill & LIBOR
Nonresidential Cement Consumption – MO
Metric Tons
Source: PCA
Exposure to Credit Crisis Nonresidential Share of Total Cement Consumption 1 2 3 4 5 6 Source: PCA 7 8 9 10 11 12 NORTH DAKOTA NEBRASKA KANSAS IOWA MINNESOTA INDIANA NATIONAL WISCONSIN SOUTH DAKOTA OHIO ILLINOIS MISSOURI MICHIGAN 28% 21% 21% 20% 20% 18% 18% 16% 16% 15% 15% 14% 12%
Office Vacancy Rates.
Percent Vacant Source: CB Commercial
Office Vacancy Rates
Metros with largest increase in vacancy rate, % Vacant
Q4, 2008 Q4, 2007 Source: CBRE
Office Cement Consumption - MO
Metric Tons
Source: PCA
Industrial Vacancy Rates Percent Vacant 25 20 15
Kansas City
10 5 0 1995Q1 Source: CB Commercial 1999Q3 2004Q1
St. Louis
2008Q3
Industrial Production – U.S.
Institute of Supply Management Index Source: CB Commercial
Industrial Vacancy Rates
Metros with largest increase in vacancy rate, % Vacant
Q4, 2008 Q4, 2007 Source: CBRE
Industrial Cement Consumption- MO
Metric Tons
Source: PCA
Retail Sales Decline… Annual Percent Change Source: U.S. Census Bureau
Retail Cement Consumption
000 Metric Tons
Source: PCA
Public Construction
Cement Demand Composition: 5Y AVG U.S.
Missouri Public Residential Nonresidential
2009 Fiscal Deficits Deficit % Share of Total Expenditures No Deficit Source: PCA/Census
OR WA MT ID WY CA NV UT AZ NM CO VT NH ME ND SD NE TX KS OK MN IA MO AR WI IL MS MI PA IN TN AL KY OH GA WV VA NC SC NY NJ DE MD CT MA RI LA FL HI
0-10% 11%-15% 16% +
Fiscal Health - Missouri Surplus/Deficit Index, 2005=100 Surplus Deficit
Exposure to Fiscal Deficits SAFETEA-LU Share of Total Highway Spending 1 2 3 4 5 6 Source: PCA 7 8 9 10 11 12 MINNESOTA IOWA KANSAS ILLINOIS OHIO MICHIGAN NATIONAL WISCONSIN NEBRASKA MISSOURI INDIANA SOUTH DAKOTA NORTH DAKOTA 25% 26% 29% 29% 34% 34% 34% 35% 39% 40% 40% 49% 49%
Public Cement Consumption - MO
000 Metric Tons 2008: -2.0% 2009: -8.3% 2010: -2.6% 2011: +4.1%
Source: PCA
Take a Step Back…
Current Stimulus Plan
$787 Billion $120B Infrastructure/Science $27.5B Highways (Missouri: $637 Million) Allocation (70% State / 30% Local) $196B Aid to State Governments $54B Fiscal Relief $282B Tax Cuts
House Bill
Obama
Inaugurated Senate Passes & Bill Signed Federal Paperwork State Paperwork Bid Letting Bid Review Contractor Paperwork Construction Begins
“Shovel Ready” Timeline
Jan Feb March April May June July August Job Creation May Come Later Than Many Expect
Phase I Phase II Phase III
Stimulus Timeline
Policy Tool Objective 2009 Job Saving 2010 2011 Job Creating
Tax Cuts, Entitlement Spending, State Aid Stabilize Economy, halt adverse momentum Shovel Ready Projects Long Term Investments Job Creation Job Creation, Address Structural Economic Issues
U.S. Cement Demand -- Senate Stimulus Scenario
Fall Forecast Annual Change
2009
85,485 -11.6%
2010
83,327 -2.5%
2011
91,507 9.8% No Stimulus Annual Change Direct Tons Indirect Tons Total Added Demand Total Market Annual Change 76,950 -19.0% 70,025 -9.0% 76,327 9.0% 5,004 500 5,504 16,972 3,394 20,366 6,641 13,281 19,922 82,454 -13.2% 90,391 9.6% 96,248 6.5%
Total Cement Consumption – Missouri
000 Metric Tons No Stimulus Stimulus 2008: -12.6% .................
2009: -11.9% .................
2010: -1.9% (+9.5%) % ………..
Source: PCA
Long Term Cement Consumption Thousands Metric Tons Missouri 2007: 2.4 MMT to 2030: 3.7 MMT
Long Term Conclusions
Cyclical downturn is temporary.
Growth rates 2011-2013 extremely strong.
Demographics remain favorable.
Green building adds to consumption.
Residential alone could add 9MMT over demographics.
Consumption could approach 200MMT by 2035.
Cement & Construction Outlook
MCA Winter Conference
February 16, 2009 Dave Zwicke, PCA Regional Economist