Transcript Welcome Insert Title Here - Portland Cement Association

Cement Outlook
IEEE
May 2011
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009
Portland Cement Consumption: Spring
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
Net Capacity Expansion
Thousand Metric Tons
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
The Recession has resulted in commissioning delays and potentially
cancelation of expansions
Cumulative Market Imbalances
Million Metric Tons
80
70
60
50
40
30
20
10
0
1974-1975
1979-1982
1991-1992
2000-2002
2006-2010
Cement Capacity Utilization
Percent Capacity Utilized
100%
80%
60%
40%
20%
0%
2002
2004
2006
2008
2010
2012
2014
Introduction: Overview
 Short Term Outlook: 2011-2012
 Cyclical Economic
 Cyclical Construction Sector Performance
 Market Imbalances, Correction Process

Medium Term Outlook: 2013-2015
 What the recovery looks like.
 Long Term Outlook: 2016-2030
 Demographics
 Long Term Growth, Per Capita Assessments
 Regulatory Impacts
Economic Outlook
Economic Adversity Abates 2011/12
2006
2007
2008
2009
Sub-Prime/Exotics
Energy
Lending
Standards
Labor
Markets
State
Deficits
The Abatement of the
Conditions that Put Us
In recession…Recede
More Slowly in the
Context of Slower Job
Creation
2010
2011
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:
Net Job Gains: Fall Forecast Vs Actual
Thousand Net New Jobs
300
Actual
200
100
0
-100
Fall Projection
-200
-300
June
September
Jan-11
March
Oil Price Impact on Economic Activity
0.00%
$116
-0.20%
-0.40%
$104
$108
$119
$114
Real GDP Growth
Rate
-0.60%
-0.80%
Consumer Spending
Growth Rate
-1.00%
2011
2012
2013
2014
2015
Connect With Concrete
Inflation Price Outlook
Annual Percentage Change CPIU
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Federal Reserve Target Rate
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
3.2 Million Foreclosures
in 2010.
1.1 Million Bank
possessions.
Depress
Prices
Depressed
Home
Builder ROI
Adds supply.
Longer carry costs.
Bank owned properties
discounted.
Lower revenues.
Erodes expected ROI.
Pressures new home
prices.
Delays recovery in
starts.
Residential: Re-Set Scenario
$ Billion
40
35
30
Alt-A
25
Subprime
Resets
20
15
Option
Adjustable
10
5
0
2007
2008
2009
2010
2011
2012
2013
2014
Months’ Supply: Single Family
Number of months required to burn off existing inventory at current selling rates
14
12
10
8
6
Desired Days Supply
4
2
0
2006
2007
2008
2009
2010
2011
Residential Cement Consumption: Spring
Thousand Metric Tons
50,450
45,450
40,450
35,450
30,450
25,450
20,450
15,450
10,450
5,450
450
1998
2000
2002
2004
2006
2008
2010
2012
2014
Nonresidential Drag
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 until 2013
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 Buildings Recovery Timing
32.0 Million Office Jobs Equates to Full Occupancy
27.5 Million Office Jobs Equates to Stable Leasing Rates
27.0 Million Office Jobs Today
Implying…..
500,000 Office Jobs must be
created before leasing rates stabilize
Since 1 in 5
Jobs Are In
The Office
2.5 million Jobs
This condition may not materialize until late 2011
This equates to a total job creation number of roughly
Nonresidential Cement Consumption: Spring
Thousand Metric Tons
30,450
25,450
20,450
15,450
10,450
5,450
450
1998
2000
2002
2004
2006
2008
2010
2012
2014
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
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
ARRA Spending Composition Assumptions
Billion $
Cement
Consumption
2,951,000 MT
14.0
12.0
10.0
Cement
Consumption
583,000 MT
Cement
Consumption
2,310,000 MT
8.0
Cement
Consumption
214,000 MT
6.0
4.0
2.0
0.0
2009
Resurfacing
2010
2011
Widening & New Route
Chart Excludes “Other” Spending
2012
Bridge
Roadway Cement Consumption Outlook
Thousand Metric Tons
State &
Local
40,000
35,000
30,000
25,000
20,000
15,000
10,000
SAFETEA-LU/
Highway Bill
ARRA
5,000
0
2007
Source: PCA
2008
2009
2010
2011
2012
2013
2014
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.
Connect With Concrete
Inflation Price Outlook
Annual Percentage Change CPIU
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
Federal Reserve Target Rate
Federal Reserve Tightening
Interest Rate Outlook
Interest Rates
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
1998
2000
2002
2004
2006
2008
2010
Mortgage Rate, Conventional 30
2012
2014
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.
Real Construction Spending
Billion Real $1996
800
750
700
650
600
550
500
450
1998
2000
2002
2004
2006
2008
2010
2012
2014
US Population
Thousands of Persons
US Population Adds Roughly 65 Million People
by 2030 …. a 22% Increase.
Demographics: 2010-2030
 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
Competitive Position
“New Normal” or “New Headaches”
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.
Concrete’s Relative Price Position
Improvement Based On:
Relative Asphalt/Concrete PPI
160
150
- China’s Economic Growth
Improvement Based On:
Modest
- Housing Recovery
- Chinese Demand
-Mountain Pine Beetle
140
130
120
110
100
90
Relative Steel/Concrete PPI
80
Very Modest
180
70
60
160
Source: Bureau of Labor Statistics: Producer Price Index, Asphalt
Paving Mixtures & Blocks, Ready Mix Concrete
Improvement Based On:
- Rising Oil Prices
- Coker Investment
Significant
140
Relative Lumber/Concrete PPI
120
180
100
160
80
140
60
120
100
Source: Bureau of Labor Statistics: Producer Price Index, Steel
Mill Products, Ready Mix Concrete
80
60
Source: Bureau of Labor Statistics: Producer Price Index, Lumber
and Wood Products, Ready Mix Concrete
Concrete’s Relative Price Position Vs Asphalt
Relative Asphalt/Concrete PPI
160
150
140
130
120
110
100
90
80
Improvement Based On:
- Rising Oil Prices
- Coker Investment
Significant Competitive
Price Gains for Concrete.
Even After Considering
EPA Compliance Costs
70
60
Source: Bureau of Labor Statistics: Producer Price Index, Asphalt
Paving Mixtures & Blocks, Ready Mix Concrete
Size of the ConcreteAsphalt Competitive
Arena:
Huge
Connect With Concrete
Oil Price Outlook
Price Per Barrel of Oil
140
120
100
80
60
40
20
0
Approximate Concrete-Asphalt
Parity Range at 2009 levels of
Coker Installations
Announced New Coker Installations
Cumulative: Thousands of Barrels Per Day
Coker Capacity Increases Five Fold – Lowering Oil Price Parity Threshold
After the Crisis: “New Normal ”: Material Selection Process
 While Government can be slow to react, the Market Mechanism eventually
effects its decision making process.
 Focus on federal & state deficit reduction.

Restructure of entitlement programs politically toxic.

Focus shifts on spending efficiency.
 State Spending on transportation accounts for $120 billion annually.

Structural factors in state DOT material selection process inhibit free market
decisions regarding the lowest cost (initial bid and life cycle) from being
realized.
 Escalators, Alternative Bid, equivalent design
 Inhibitors cost states billions annually – to the detriment of other spending
priorities.
Concrete’s Relative Price Position Vs Steel
Relative Steel/Concrete PPI
180
160
Improvement Based On:
- Synchronized World
Growth
- China’s Strength
140
120
Moderate Competitive
Price Gains for Concrete.
100
80
Even After Considering
EPA Compliance Costs
60
Size of the Concrete-Steel
Competitive Arena:
Source: Bureau of Labor Statistics: Producer Price Index, Steel
Mill Products, Ready Mix Concrete
Moderate
Concrete’s Relative Price Position Vs Wood
Relative Lumber/Concrete PPI
Improvement Based On:
180
160
140
120
100
80
60
Source: Bureau of Labor Statistics: Producer Price Index, Lumber
and Wood Products, Ready Mix Concrete
- Housing Recovery
- Chinese demand increases
in face of Russian tariffs.
- Pine Mountain Beetle
epidemic
Very Modest Competitive
Price Gains for Concrete.
Size of the Concrete-Wood
Competitive Arena:
Large
Competitive Position and Potential Market Share Gains are
Linked to Global Economics
 Concrete’s competitiveness in the North American marketplace will be
increasingly impacted by international demand conditions – particularly China.
 PCA expects sustained Chinese growth and synchronized world growth
materializes 2013 and beyond.
 Concrete’s relative price position improves across all material segments in this
global economic context.
 If, synchronized growth fails to materialize, or China’s growth subsides,
concrete’s competitive position declines – perhaps significantly.

Demand for other commodities declines – prompting pricing adjustments in
among North American material competitors (steel , asphalt, wood).

China could vent excess capacity – depressing steel prices.
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
Regulatory Environment
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?
NESHAP : 2013
 Limits emissions of Hg, HCL, PM, THC
 To comply: $3.2 billion
 Capital & operating cost addition: $17
 Plant shut downs & Capacity shut downs
Costs of Complying to EPA NESHAP
Baghouse
Wet Scrubber
ACI
ACI & Wet Scrubber
RTO
RTO & Wet Scrubber
Average
Annual Capital
Costs Per Ton
Average
Annual Operating
Costs Per Ton
Proportion of
Industry Required
$0.74
$4.57
$3.71
$6.39
$0.00
$8.06
$2.09
$5.11
$3.37
$8.51
$0.00
$8.25
100.0%
5.9%
75.0%
18.0%
0.0%
37.0%
Weighted
Cost
$2.84
$0.57
$5.31
$2.68
$0.00
$6.03
$17.43
Includes All Plants: No Shut Downs
U.S. Supply Balance: EPA NESHAP
Million Metric Tons
Cement Consumption
Imports: 54 MMT
150
125
100
75
Cement Production
EPA: NESHAP Impact
50
CISWI : 2015
 Targets only plants that burn alternative fuels
 Limits emissions of 9 air pollutants
 Roughly 49 MMT of capacity impacted
 To comply: $2 billion, or stop burn
 Capital & operating cost addition: $21
New Source Regulations
 NESHAP, CISWI, NSPS, NAAQS, Tailoring Rule
 EPA policies NOT static – They are DYNAMIC and become more rigorous with
time.
 Age composition of Kilns suggest 35 plants must modernize to remain world
class competitive by 2030
 Prevent New Source standards by non-investment – ultimate closure of an
additional 3.4 MMT
Capacity Age Distribution
Percent of Total Capacity (2008)
60%
NESHAP & CISWI: Standards for
Existing. Regulation becomes
more rigid for “new sources”
50%
40%
30%
20%
10%
0%
Pre-1950
1950's
1960's
Wet = 13.7 MMT
Dry = 83.7 MMT
1970's
1980's or later
Fly Ash: Hazardous Waste
 Comment Stage: Two Options – Same Result
 Litigation Threat – Reduces/Eliminates Use
 Utilities – Landfill and bury costs into rate base: No Ash
 Replace fly ash use in concrete mixes with cement
 Increase CO2 worldwide
Fly Ash Consumption by Concrete & Cement
Thousand Metric Tons
Concrete Add: Blue
Closing the Supply Gap
 100 MMT + = 2030 Gap
 40-45 MMT Import Capacity
 Two Options:
 Foreign Source: Add Import Terminals
 Domestic Source: Add 50 Plants (2 MMT per Plant)
Investment Scheme Pre-Regulation
Investment
in Other
Countries
Multinational
Investment $
Expansion
US Investment
Modernization
Investment Scheme Post-Regulation
Investment
in Other
Countries
Multinational
Investment $
Higher
Relative ROI
Expansion
US Investment
Compliance
Modernization
Before Settling On Import Sourcing Strategy….
- $ Per Barrel, WTI (estimated), Dry Bulk Freight Rates
Synchronized World Growth:
Characterized by Emerging
Middle Class in Developing
Economies
Cement Outlook
IEEE
May 2011
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009