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