Transcript Welcome Insert Title Here - Portland Cement Association

Cement Outlook
IFEBP
February 2012
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009
Economic Outlook
Synchronized Recovery Theory
Job creation
determines how
quickly the recovery
cycle spins.
Heals
Structural
Restraints
Incremental
Demand Gains
Lending Standards
Ease & Hiring
Accelerates
Defaults &
perceived
lending risks
decline
In the context of
moderating
productivity
Gains Leads to:
Job Gains
Sentiment
Gains
Sentiment
includes
Consumer,
Business &
Banks:
False Hopes: Net Job Creation
Annualized Net Job Creation
8000
3.7 Million Annualized 3
month Moving Average
6000
2.7 Million Annualized 3
month Moving Average
4000
2000
0
-2000
-4000
-6000
-8000
-10000
-12000
Jan 2005
Jan 2007
Jan 2009
Jan 2011
Employment Outlook
Annual Change, Thousands Employed
3000
2000
1000
0
-1000
-2000
Potential
Upside Risk
-3000
-4000
-5000
Source: BLS
-6000
2000
2002
2004
2006
2008
2010
2012
2014
Recession Recoveries: 3 Years Following, Annual Average
1991: 3.08 Million, 2001: 2.22 Million, Current: 1.35 Million
2016
Real GDP Outlook
Annualized Growth
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
Housing Recovery
Ingredients for a Starts Recovery
Homebuilders Expected ROI
Inventory no
higher than 5
months supply
Carry costs erode
expected ROI.
Price stability
Weaker the price
environment…lowers
the months’ supply
trigger point.
Foreclosures Accelerate
Foreclosure Impacts
Add to
Inventory
2.5-3.0 Million
Foreclosures in 20092011 annually.
Nearly 1 Million Bank
possessions annually.
Depress
Prices
Depressed
Homebuilder
ROI
Adds supply.
Longer carry costs.
Bank owned properties
discounted.
Lower revenues.
Erodes expected ROI.
Pressures new home
prices.
Delays recovery in
starts.
The Residential Recovery Process
Mortgage Resets
Foreclosures
Bank Possessions
Shadow Inventories
Heightened Inventories
Inventory Burn Off
Working Through
Structural Repair of
Housing Market Will Take
Time Before Impacting
Housing Starts.
Price Stability
Starts Recovery
Single Family Sales Outlook
Thousands of Units
8000
7000
6000
5000
4000
3000
2000
2003
2004
2006
2008
2010
2012
Single Family Months Supply
Thousands of Units
12
10
8
6
4
Desired Month’s
Supply
2
0
2003
2004
2006
2008
2010
2012
Single Family Home Price Outlook
Y-O-Y Percent Change
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
2003
2004
2006
2008
2010
2012
Single Family Upside Risk?
Single Family Starts Projections Comparison
Thousand Starts
2011
2012
2013
PCA
Mortgage Bankers Association
NAHB
National Association of
Realtors
421
420
424
443
474
495
567
619
723
416
480
----
Other Associations’ Average
Tons Per Start
Upside Risk (000 Tons)
420
19.2
--429
483
19.2
768
671
19.2
1,997
Nonresidential Drag
Nonresidential Construction
Real 1996 PIP $
$200,000
$180,000
$160,000
$140,000
$120,000
$100,000
Upside:
Public Utilities, Farm,
Retail, Industrial
$80,000
$60,000
-50%
$40,000
2003
2004
2005
Source: Dept of Commerce, PCA
2007
2008
2010
2011
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
Leads to a
recovery in
office
construction.
Asset
Prices Firm
New Office
Hiring
Vacancy
Rates
Decline
Credit Troubles
Ease
Defaults &
perceived
lending risks
decline
1/5 of all jobs in
the office.
Leasing
Rates
Stabilize
After reaching
threshold of
roughly 14%
vacancy rate
Office Employment
Thousands Employed
Vacancy Rate:
11.3%
31,000
Vacancy Rate:
12.7%
30,000
29,000
Vacancy Rate:
18.3%
28,000
27,000
26,000
25,000
2000
2002
Source: BLS
2004
2006
2008
2010
2012
2014
2016
Office Building Valuation
Property Value Index, 2000=100
190
170
150
130
110
90
-36%
70
50
2003
2004
2005
Source: Moody’s
2006
2007
2008
2009
2010
2011
REIT Office
Dow Jones REIT Index, Total Return, 1990=100
Recaptured 70%
1,200
1,000
800
600
400
200
-69.9%
0
2003 2004 2004 2005 2006 2007 2008 2009 2010
Source: Dow Jones REIT Index
Public Recovery
State Deficits
$ Real
300,000,000
200,000,000
100,000,000
0
-100,000,000
-200,000,000
1999
2001
2003
2005
2007
2009
2011
2013
Source: NIPI Data
National Estimates: States Do Not Heal in a Synchronized Fashion
2015
ARRA Sterilization: State Spending
Change in Spending, Real Million 1996$
4000
3000
2000
ARRA $
ARRA $
1000
0
-1000
-2000
76%
Sterilization
State $
43%
Sterilization
State $
-3000
2009
2010
ARRA Sterilization: State Spending
Change in Spending, Real Million 1996$
4000
Increase In
State Spending
Reduces
Adverse Impact
3000
2000
ARRA $
ARRA $
1000
State $
0
-1000
State $
State $
ARRA $
-2000
-3000
-4000
2009
2010
2011
Discretionary State Highway Cement Consumption
Thousand Metric Tons
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
Highway Bill Cement Consumption Projections
Spring Versus Summer Assumptions
24,000
Spring
Forecast
22,000
20,000
18,000
16,000
Fall Forecast
14,000
12,000
10,000
2002
2004
2006
2008
2010
2012
2014
The Outlook
Portland Cement Consumption
Thousand Metric Tons
140,450
120,450
100,450
80,450
60,450
40,450
20,450
450
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Portland Cement Capacity Utilization
Production as Percent of Capacity
120%
100%
80%
60%
40%
20%
0%
2002
2004
2006
2008
2010
2012
2014
2016
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.
After the Crisis: “New Normal”: Economics
 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”: Construction
 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.
US Population
Thousands of Persons
US Population Adds Roughly 65 Million People
by 2030 …. a 22% Increase.
Licensed Drivers On the Road
Millions of Licensed Drivers
270
250
230
210
190
170
150
2000
2005
2010
2015
Source: FHWA & PCA Estimates
2020
2025
2030
2035
After the Crisis: “New Normal”: Global
 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.
Initial Bid Concrete Vs Asphalt Paving Costs
Dollars Per Two Lane Road Mile - Urban
$1,400,000
Oman Data
US
Average:
13.5%
$1,200,000
$1,000,000
Oman Data
US
Average:
15.3%
Asphalt
42%
Advantage
15%
Advantage
18%
Disadvantage
$800,000
$600,000
$400,000
Concrete
$200,000
2003
2007
2011
2015
2019
Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
After the Crisis: “New Normal”: Regulation
 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?
U.S. Supply Balance: EPA NESHAP
Million Metric Tons
Cement Consumption
Imports: 54 MMT
150
125
100
75
Cement Production
EPA: NESHAP Impact
50
Fly Ash Rule Could Add 20 MMT to Cement Consumption
Cement Consumption: Long Term
Million Metric Tons
190
170
150
130
110
90
70
50
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Growth in Context of Population Changes, Slower US Economic Growth, Strong
Global Growth, Climate Change Legislation and the “Green” Revolution.
2030
Cement Outlook
IFEBP
February 2012
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009