Transcript Welcome to Carter - Portland Cement Association

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Cement Outlook: 2008-2009
Ed Sullivan, Chief Economist PCA
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The Stars Have Aligned
 Near Term Adversity
 Economic outlook remains dim.
 Adversity may continue longer than expected
 Longer Term Opportunity
 Oil and Asphalt prices high (structurally).
 State fiscal problems emerging – long and short term
 Concrete VS Asphalt paving costs
 Accent on energy-saving materials
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Longer Lasting Growth Recession
 The economy is weak….and it may not be mild.
 Outperforming PCA expectations
 Despite volatile data…economic fundamentals deteriorating.
 “Growth Recession”: All the symptoms of recession….but marginal
GDP growth materializes
 Rising unemployment, declining consumer & business confidence
 Fiscal & Monetary Policy actions will not have expected stimulatory
impact.
 Debt & Adverse Momentum
 Timing lags
 Lending aversion toward risk is spreading
 Bank/Financial stresses imply multiple adverse impacts

Job losses compound economic adversities.
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Key Questions
 How deep will retrenchment go ?
 How long will it last ?
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Portland Cement Consumption
Declines Continue
Through 2009.
Peak (2005)-to-Trough (2009) Decline:
30 MMT (Worst in History)
(On a Percentage Basis: Equal to 1980-82 Recession)
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Summer Forecast Adjustments
 Growth recession.
 Slower recovery
 Delayed nonresidential retreat and recovery
 Small downward adjustment to cement
volumes for 2008-2009
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Capacity Expansion
Thousand Metric Tons
10,000
8,000
Stated Capacity
Expansions
Potential Increases
From Specification
Changes
6,000
4,000
2,000
0
2006
2007
2008
2009
2010
2011
2012
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Conclusion
 Double-digit decline in consumption with trough in 2009.
 Large capacity increases magnify potential market
imbalances.
 Imports record large, sustained declines.
 Global conditions suggest high freight rates continue.
 2008: Bears most of the burden of correcting market imbalances.
 Utilization Rates decline.
 Materializes to a greater extent in 2009.
 Days Supply Inventory remains above historical average.
 Most pressure materialize in 2009.

Past Peak (2005) not realized until 2014
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Economic Outlook
Recession is Here, and its not going to be Mild
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Introduction
 To determine the cause of a slowdown in economic Growth,
or even a recession ….
 …. Look no further than the excesses and imbalances
created during the preceding boom period.
 Debt played important role in 2003-2006 growth.
 Responsible debt?
 Easy terms & standards
 Unprecedented link in consumer spending to housing
wealth.
 Payback is tough – maybe more than consensus of
economists believe.
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The Stage is Set…
Unemployment Rate -- Percent Change Year Ago
Source: BLS
= Recession
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Sub-Prime Mortgage Resets
Total Loans Scheduled for Reset
50,000
45,000
40,000
35,000
30,000
25,000
20,000
Period of Emerging
Trouble
15,000
10,000
5,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
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Recession: Construction Declines May not
be Short or Shallow.
2006
Housing
2007
Consumer
Foreign
Capital Inflows
2008
2009
Commercial
Energy
Public
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Net Job Creation
Monthly Change in Total Non-Farm Employment, BLS
Economy has Shed 360,000
Jobs ..AND…The
Recession has Just Begun.
400
300
200
100
0
-100
-200
2005M1
2005M7
2006M1
2006M7
2007M1
2007M7
2008M1
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Monetary Policy Timing Lags
Percent Change, GDP Growth Rate, Inflation
Change in Real
GDP Growth
Rate
0.60%
0.50%
0.40%
Change in CPIU
Inflation Rate
0.30%
0.20%
0.10%
0.00%
-0.10%
-0.20%
0
2
4
6
8
10
12
14
16
18
20
22
Peak Economic Stimulus Occurs 8-9 Months After Cut
24
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Fiscal Policy Impacts Per Month
Percent Change, GDP Growth Rate
5.0%
Tax Rebate
Planned Impact
4.5%
4.0%
3.5%
Tax Rebate Impact With
PCA Debt Reduction
Assessment
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
May
July
September
November
January
March
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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
Since January 1st, Gasoline
Prices have increased 1.33
cents = Equating to a $130
Billion Annualized Draw on
Consumer Spending.
Source: Department of Energy
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Rising Inflation Narrows Fed Options: Slows Growth
CPIU, Percent Change
Fed Policy: Stop, Go, Stop
Higher Interest Rates
Materialize 2009-2010
Supply Side Inflation Ingrained into
cost structure
- Oil, Food, Transportation, Labor.
Source: BLS, PCA
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Economic Growth Outlook: Growth Recession
Percent Change, GDP Growth Rate
Tax Rebate
Bump
Hard to Sell Businessmen that Recession is “technically”
Avoided or Short Lived – Distress Continues well Into 2009.
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States in Recession
As of May, 2008
WA
NH
MT
ME
VT
ND
OR
MN
ID
NY
SD
MA
WI
RI
WY
MI
CT
IA
PA
NE
NV
UT
IL
IN
DE
CO
MD
WV
CA
KS
NJ
OH
VA
MO
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
Recession
GA
At Risk
LA
TX
AK
FL
HI
Growing
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Residential Outlook
Recovery Delayed
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Home Inventory
Thousands of Homes for Sale, December
5000
4500
New
4000
New
3500
New
New
3000
New
New
Existing
2500
Existing
Existing
2000
Existing
1500
Existing
Existing
1000
500
0
Existing
Homes Account for 87% of
2005
2006
Total2004
Home Inventory
2007
2008
2009
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Housing is the catalyst…
Units (000)
Source: Census, S&P Case Shiller
Annual Growth
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Lenders Reporting Tighter Lending Standards: Mortgages
Percent Reporting Tighter Lending Standards
60
Tighter
50 Credit Will Undermine Sales
Recovery
Easy
Credit
Period
40
30
20
10
0
-10
Sub-Prime Lending Has
disappeared.
-20
2000Q1
2002Q1
2004Q1
2006Q1
2008 Q1
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Foreclosures on the rise…
% of loans outstanding 90 days pas dues, SA
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Foreclosures remain concentrated…
% of households defaulting on their 1st mortgage, 08Q1
Below U.S.
Near U.S.
Above U.S.
Source: Equifax, Economy.com
US: 2%
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Employment declines …
Change in payroll jobs (000)
400
300
Period of
slowed hiring
200
100
0
2007: + 1,096,000
-100
YTD: -438,000
-200
2005
Source: BLS
2006
2007
2008
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Residential
 Slow Down in Job Growth Prolongs
Recovery in Sales and Inventory
Correction.
 Late-2009 Recovery: Nationally
 Possibly Longer
 Regional Differences
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Residential: Housing Act
 Foreclosure Relief
 400,000

Down Payment Support
 $7,500 or 10%, whichever is less

Higher FHA loan limits

Higher Credit for Fannie & Freddie
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Single Family Housing– United States
000 Starts
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Single Family Home Size: United States
Average Square Feet of New Home
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Nonresidential Outlook
Declines in 2008 and 2009
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Nonresidential Construction

Nonresidential 2006-2007 Strength
 Strong Expected ROI Fostered by Strong Economic Growth
 Pent-up Demand
 Easy Credit Conditions

Nonresidential 2008-2009 Softening
 Expected ROI Softens With Overall Economic Slowdown
 Credit Conditions Tighten
 Risks and Uncertainty Grow
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Nonresidential Construction

Nonresidential 2006-2007 Strength
 Strong Expected ROI Fostered by Strong Economic Growth
 Pent-up Demand
 Easy Credit Conditions

Nonresidential 2008-2009 Softening
 Expected ROI Softens With Overall Economic Slowdown
 Credit Conditions Tighten
 Risks and Uncertainty Grow
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Lenders Reporting Tighter Lending Standards:
Commercial
Percent Reporting Tighter Lending Standards
40
Medium to Large
Firms
Easy
Credit
Period
30
20
10
0
Small Firms
-10
-20
-30 Sub-Prime Has Spilled into
Commercial Credit Markets
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008 Q1
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Business Confidence Has Been Shaken
Percent of Firms Reporting a Positive Business Outlook, NAM Survey
120
Alabama Business
Leaders Confidence
Index has declined 23%
during past year.
100
80
Bullish
Business
Attitudes
60
40
20
0
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008 Q1
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Monthly Nonresidential Dollars
Millions of 1996 Dollars
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Nonresidential Construction

2007 Momentum is Burning Off
 Measured by PIP, Nonresidential Outperforming PCA
Expectations.

But, Cement Intensities Declining
 Evidence that a retraction in nonresidential lies ahead

Fundamentals Deteriorate…Longer Recovery
 Larger declines of 2009
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Public Outlook
Slower Growth in 2008, Problems Looming Ahead
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Cement Composition - Missouri
2005
Public
2009
Residential
Nonresidential
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States With Projected
Budget Shortfalls
District of
Columbia
2009 Shortfall
2010 Shortfall
No Shortfall
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Conclusion
Excesses Conclusion
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Market Imbalances
- Changes in Cement Consumption Tons + Capacity Expansion Tons
20,000,000
15,000,000
2007
1974
1991
10,000,000
1981
2002
5,000,000
0
-5,000,000
-10,000,000
-15,000,000
1973-74
1970
1980-82
1980
1990-91
1990
2000-01
2000
2007-2008
2010
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Freight Rates: Cyclical or Structural Trends ?
$ Per Metric Ton
HANDYMAX 40-50,000 DWT
South East Asia U.S. Gulf
$100
$90
$80
$70
$60
$50
$40
$30
$20
HANDYSIZE 28-40,000 DWT Transatlantic
U.S. East Coast/U.S. Gulf
$10
$0
2001M1
2002M1
2003M1
2004M1
2005M1
2006M1
2007M1
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Market Imbalances: After Import Reductions
- Changes in Cement Consumption Tons + Capacity Expansion Tons
15,000,000
10,000,000
5,000,000
2008
0
2007
-5,000,000
1980-82
-10,000,000
1970
1973-74
1980
1990-91
1990
2000-01
2000
2009 !
2010
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Conclusion
 Double-digit decline in consumption with trough in 2009.
 Large capacity increases magnify potential market
imbalances.
 Imports record large, sustained declines.
 Global conditions suggest high freight rates continue.
 2008: Bears most of the burden of correcting market imbalances.
 Utilization Rates decline.
 Materializes to a greater extent in 2009.
 Days Supply Inventory remains above historical average.
 Most pressure materialize in 2009.

Past Peak (2005) not realized until 2014
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Cement Consumption 2008
District of
Columbia
< -10%
-5%–-10%
0–-5%
1%– 3%
> 3%
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Cement Consumption 2009
District of
Columbia
< -10%
-5%–-10%
0–-5%
1%– 3%
> 3%
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Cement Consumption 2011
District of
Columbia
< -10%
-5%–-10%
0–-5%
1%– 3%
> 3%
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Take a Step Back
Longer Term Outlook
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Take a Step Back
 Cyclical correction is temporary.
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US Population
Thousands of Persons
400,000
350,000
300,000
250,000
US
Population Adds Roughly
200,000
65 Million
People by
2030 …. 2000
1980
1990
a 22% Increase.
2010
2020
2030
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Demographics: 2007-2030
 Population Adds 65 Million Persons
 Adds 9.1 Million School-Age Persons
 Education Construction
 Adds 34 Million Retirement Age Persons
 Medical
 Adds 31 Million Households
 Housing, Retail & Infrastructure
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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
2030
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Take a Step Back
 Population Gains In Context of Structurally
Higher Energy Prices
 World Demand Conditions have Changed
 Climate Change
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Highway Lane Miles
Thousands of Miles
11,000,000
10,000,000
9,000,000
8,000,000
Just to Maintain Current Highway
7,000,000
Congestion
Levels, Federally Aided
Highways Must Expand Nearly 25%
by 2030 . Given 49 Million Additional
6,000,000
Licensed Drivers.
1996 2000 2004 2008 2012 2016 2020 2024 2028
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2007 Road Congestion
Lane Miles per 1,000 Licensed Drivers
Mountain
West North Central
East North
Central
New
England
Middle Atlantic
District of
Columbia
Pacific
West South
Central
≤ 30 mls/1000
31 - 50 mls/1000
51 - 70 mls/1000
East
South
Central
71 – 90 mls/1000
South
Atlantic
≥ 90 mls/1000
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2030 Road Congestion
Lane Miles per 1,000 Licensed Drivers
Mountain
West North Central
East North
Central
New
England
Middle Atlantic
District of
Columbia
Pacific
West South
Central
≤ 30 mls/1000
31 - 50 mls/1000
51 - 70 mls/1000
East
South
Central
71 – 90 mls/1000
South
Atlantic
≥ 90 mls/1000
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Medicaid Pressures Build
Billions of $
Blue/Solid: Total Medicaid Spending
$3,000
34%
Red/Striped: State Medicaid Spending
$2,500
$2,000
30%
21.5% of Total
State
Expenditures
$1,500
25%
$1,000
$500
$0
1970
1995
2004
2009
2014
2019
2024
2029
2032: State Medicaid Spending Exceeds One Trillion $
2034
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Will Medicaid “Crowd Out” Highway Spending?
Billions of Real State Spending Targeting Transportation
$100
Transportation Spending:
Constant 8% Share of Budget
$90
$80
$70
$60
Transportation Spending:
Share Reduced to 7% of
Budget
$50
$40
Transportation Spending:
Share Reduced to 5% of
Budget
$30
2007
2012
2017
2022
2027
Gasoline Tax Increases Must Be Viewed in the Context of Future Fiscal Pressures Facing States
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Competitive Price
Producer Price Index, 2003=100
Source: BLS
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Paving Construction

Bid and Life-Cycle Costs now in favor of concrete

Rising Asphalt costs are primarily structural…not
temporary

Significant opportunities….

Even amidst funding constraints
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Per Home, Lifetime C02 Savings ICF Home Over Frame
Co2 Metric Tons, Per Home
100
90
Total Heating & Cooling C02
Saving: 92 Tons per Home
80
70
60
50
40
Additional C02 Emitted
by Cement Production
30
20
10
0
2007
2012
2017
2022
2027
2032
2037
2042
2047
Conservatively Assumes 50 Year Life of Home
2052
2057
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ICF & Related Systems: CO2 Savings
Metric Tons of CO2
Gains Achieved Though Energy Savings In
Space Heating & Cooling
20,000,000
30%
18,000,000
16,000,000
14,000,000
25%
12,000,000
10,000,000
8,000,000
10% of Total
Housing Starts
20%
6,000,000
4,000,000
2,000,000
0
2007
2012
2017
2022
2027
2032
2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share
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Potential “Green” Gains: ICF & Related Systems
Incremental Gains in Cement Consumption, Metric Tons
9,000,000
30%
8,000,000
25%
7,000,000
6,000,000
20%
5,000,000
4,000,000
3,000,000
10% of Total
Housing Starts
2,000,000
1,000,000
0
2007
2012
2017
2022
2027
2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share
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Nuclear Power Plant Expansion Location
21 Licenses
Submitted FY
2007 –FY
2009
Department of Energy Forecasts 110 Billion Kilowatthour Increase In
Nuclear Energy Supplied Electricity by 2030
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Florida: Long Term Consumption
Million Metric Tons
25000
20000
15000
10000
5000
0
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
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Financial Liquidity
TED Spread –difference between 3m T Bills & LIBOR
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U.S. Cement Industry
 Double-digit decline in consumption with trough in 2009.
 Large capacity increases magnify potential market
imbalances.
 Imports record large, sustained declines.
 Global conditions suggest high freight rates continue.
 2008: Bears most of the burden of correcting market imbalances.
 Utilization Rates decline.
 Materializes to a greater extent in 2009.
 Days Supply Inventory remains above historical average.
 Most pressure materialize in 2009.

Past Peak (2005) not realized until 2014
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Cement Outlook: 2008
Ed Sullivan, Chief Economist PCA