Construction

1
Construction Cement Outlook 2006

• PCA Joint Meeting
• March 8, 2006
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist
• Awarded Most Accurate Forecaster (GDP) by Chicago
  Federal Reserve

2
Bottom Line Conclusions

• Near Term Growth Stronger
• Residential Weaker
• Downside Risks Elevated
• Nonresidential Slower Recovery
• Public Fiscal Recovery Stronger
• Dichotomy of Growth Continues
• Stronger Growth Favors South and West
• Imports Higher
• Tight Markets Continue through 2008
• Can Market Absorb Expansion?
• National Vs Regional

3
U.S. Economic Outlook
4
Economic Growth Conclusions

• Foundations for Growth Firm
• Sustained job growth.
• Moderate growth, below 2004 2005
• Net Job Creation Strong
• More than 2 million jobs created in 2006 and 2007
• Consumption Growth Slows 2006-2007
• Sustained High Energy Prices
• Greater pricing traction
• Adjustable/Exotic Mortgage Re-adjustment.
• Interest Rates Rise Gradually
• Investment Sector Strength Continues
• Large Trade Deficit and Federal Deficit Act as
  Drag on Growth

5
Economic Outlook Real GDP Growth
Real GDP Annual Growth Rate
2004 4.4
2006 New 3.5
2006 Old 3.3
2003 3.1
2005 3.5
----------2003----------
-------2004-------
-------2005------
-------2006-------
6
Construction Cement Outlook

• Overview

7
Changing Composition of Construction Spending
Growth
2006-2009
2001-2005
Low Interest Rates, Weak Economy
Rising Interest Rates, Strong Economy

• Growth Leader Residential
• Low Interest Rates
• Public
• State Tax Revenues Hurt by Anemic Economic Growth
• Growth Laggard Nonresidential
• Weak Economy

• Growth Leader Nonresidential
• Strong Economy
• Public
• State Tax Revenues Recovery Due to Strong
  Economic Growth
• Growth Laggard Residential
• Rising Interest Rates

US Construction Markets Do Not Lose Momentum With
Rising Mortgage Rates and Slowdown in Housing
8
Cement Intensities
9
Composition Of Cement Growth Construction
Activity Vs Cement Intensity Growth
Annual Percent Change, Real Put-In-Place
Construction Cement Intensity
Construction Activity Growth
Construction Activity Growth
Cement Intensity Growth
Cement Intensity Growth
Cement Intensity Growth

10
Reasons for Continued Cement Intensity Gains

• Competitive Price Position Vs Other Building
  Materials
• Compare from 2000
• Large advantage Even with recent declines in
  steels and increases in concrete.
• Composition of Construction
• Gains associated with strengthening of higher
  intensity construction sectors
• RPG regional identification and pursuit
• Nonresidential Intensities are Cyclical
• Type of construction differs on downside and
  upside of business cycle.
• Marketing
• High Energy Prices Mixed Positive
• Concrete homes 44 more energy efficient
• Marketing
• Code Changes Hurricane
• Codes and Standards

11
Residential Construction Single Family
12
Mortgage Rate History
Annual Growth Rate Comparison
Peak to Trough 294 Basis Point Decline in
Conventional 30 Year Mortgage Rate
13
Inflation Will Easebut

• Higher Energy Prices Structure
• Still Cyclicalbut
• Stronger Asian Demand China India
• Labor Costs Rising
• Since 2000 Soft Labor Market Conditions
  Translate Into Employer Market
• Job Creation Continues
• Participation Rates Rising
• Unemployment Rates Decline below 5
• Rapid Switch from an Employer to an Employee
  Market
• Structurally Weaker Dollar
• Higher Energy Prices
• Slow Movement in Floating Chinese Wan
• Trade Deficit Widens
• Structurally Higher Transportation Costs
• Transportation Sectors Historically Depressed ROI

14
Mortgage Rate Conclusions

• Higher Inflation Premiums
• Add to Real Rates
• Federal Reserve Pursues Tighter Monetary Policy
• New Fed Chairman demonstrates resolve
• Favors Inflation Targeting (2)
• Larger Public Demand for Funds
• Middle East
• New Orleans
• Private Demand for Funds Increase
• Foreign Supply Slows
• Weak Dollar lower foreign returns
• Competing Investment Instruments

15
Mortgage Rate Outlook
Annual Growth Rate Comparison
2007 Upside Risks, 25-50 Basis Points
Avoidance of Bubble Burst Based on Gradual
Modest Increases in Mortgage Rates
16
Mortgage Environment

• Rates
• Structure of Borrowing
• Credit Conditions

17
Growing Home Price Income Gap
Annual Growth Rate Comparison
Home Prices
Household Income
18
Ratio of Home Prices to Income
Annual Growth Rate Comparison
20 Year Average
19
Mortgage Environment Structure of Borrowing

• Strong Appreciation Rates
• Monthly Mortgage Payment to Income Ratio
  Threatens Housing Expansion
• Fewer Qualify, Home Sales decline
• Increase in Alternative Financing
• Sub-Prime, 75 Adjustable
• Exotic Mortgages
• Amplified by Aggressive Appraisals
• Higher Risk In Rising Interest Rate Environment
• Alternatives Re-Adjusted to Prevailing Rates
• Shock, Consumer spending habits slow to change
• Increase in delinquencies, defaults, personal
  bankruptcy
• Credit Tightening On Horizon?

20
Mortgage Market Conditions

• 2001-2005
• Low Mortgage Rates
• Speculators Market
• Emergence of Exotic Mortgages
• Easy Credit Conditions
• Inventory Build Conditions

• 2006-2010
• Rising Mortgage Rates
• Speculators Bail
• Reduction in use of Exotic Mortgages
• Tighter Credit Conditions
• Inventory Draw Conditions

21
Inventory Draw Required
Homes on Market/Monthly Selling Rate
Inventory Draw Required
Ten Year Average
Inventory Build Required
22
Single Family Housing Starts
(000) Units
Downward Adjustment Forthcoming Growing
Downside Risks
23
Nonresidential ConstructionOverview
24
Nonresidential Construction
Annual Growth Rate
25
Key Nonresidential Assessments

• Underlying Nonresidential Drivers Improving
• Turning Point Already Achieved In Most Key
  Sectors
• Impatient Improvement Slower Than Expected
• Story Correct
• Timing
• Despite Large Percentage Gains for 2006, Most
  Markets Weak From Historical Perspective.
• Increasing Cement Intensities Reinforce
  Construction Activity Gains.

26
Office Vacancy Rates
Vacancy Rate, Metropolitan Areas
PCA Projections
200 BP Decline 2006 2007
27
Public Construction
28
Public Construction Outlook State Deficits
Billion State Surplus/Deficit, NIPA

29
Public Construction Outlook State Deficit
Estimates Fiscal Year 2004
New England
Mountain
West North Central
1.0
VT
.03
East North Central
.49
.12
0
.85
NH
2.4
.15
MA
3.0
9.3
RI
.16
.05
2.0
.17
1.3
0
1.9
CT
4.6
NJ
.41
2.4
Middle Atlantic
.38
.36
3.6
.75
1.7
.2
DE
.08
38
.4
.98
1.0
.85
MD
.2
.25
1.1
Pacific
District of Columbia
.2
1.5
2.0
0
.14
.3
.22
.4
.09
.5
South Atlantic
.11
.74
3.7
.6
East South Central
2.0
West South Central
Dollar figures, in billions, indicate amount
states had to save to balance 2004 budget.
KEY
Primary Source Newsweek July 28,
2003 Secondary Sources Natl Conf. of State
Leg., Center on Budget and Policy Priorities,
Natl Assn. of State Budget Officers, Calif.
Budget Project
Deficit as percentage of budget
30-39
0-9
20-29
10-19

30
Public Construction Outlook State Deficit
Estimates Fiscal Year 2005
New England
Mountain
West North Central
0
VT
0
East North Central
.17
0
0
0
NH
.19
0
MA
1.5
5.1
RI
.17
.0
.19
0
.9
0
.2
CT
5
NJ
.34
.21
0
Middle Atlantic
2
.6
0
0
DE
0
0
15
.3
.74
MD
.6
.9
.12
.93
.2
Pacific
District of Columbia
0
1.1
.8
.14
0
.3
.5
0
.71
.62
.9
South Atlantic
0
0
.5
East South Central

0
West South Central
Dollar figures, in billions, indicate amount
states had to save to balance 2005 budget.
KEY
Primary Source Center on Budget Policy and
Priorities Feb / 04
Secondary Source National Association of
Budget Officers
Deficit as percentage of budget
30-39
0-9
20-29
10-19
No available data

31
State Fiscal Outlook Consumer Expenditures to
Sales Tax Revenues
Left Red Line Personal Consumption
Expenditures, Right Green Bar Percent Change in
Sales Tax Revenue

32
State Fiscal OutlookJob Growth to Income Tax
Revenues
Left Red Job Growth, Thousands, Right Yellow
Percent Change in Income Tax Revenue

33
Market Conditions
34
Pre-Katrina Cement Supply Survey
No Shortage
Tight Supplies
Spot Tight Supplies
35
Supply
36
Domestic Supply Conclusions

• Domestic Supply Increases Face Limited Growth
• Characterized by high operating rates
• Persistently lean inventory position
• Murphys Law in Play
• Major expansion does not materialize until 2008.
• Domestic Increases not enough to meet potential
  demand growth.
• Supply growth must come elsewhere.

37
Inventory Days Supply
Inventory/Daily Selling Rate
Average 19
38
Domestic Supply Conclusions

• Domestic Supply Increases Face Limited Growth
• Characterized by high operating rates
• Persistently lean inventory position
• Murphys Law in Play
• Major expansion does not materialize until 2008.
• Domestic Increases not enough to meet potential
  demand growth.
• Supply growth must come elsewhere.

39
Imports
40
International Freight Rates
Per Ton
Slack Markets, Easy Availability
41
Mexican Trade Agreement
42
Import Volume
(000) metric tons
2005 Projection 33.2 MMT 2005 Actual 33.6 MMT
43
Supply Conclusions

• Domestic Supply Increases Face Limited Growth
• Characterized by high operating rates
• Persistently lean inventory position
• Murphys Law in Play
• Major expansion does not materialize until 2008.
• Supplying Market Growth Dependent On Imports
• Source Availability
• Ship Availability
• Freight Rates
• Weak
• Congested Ports
• Rail Congestion
• Terminal Limitations
• Supply Constrained Market Until 2008
• Implies downside risks to consumption projections
• No Near Term Relief from 2004/2005 Conditions

44
Capacity Expansion
45
U.S. Capacity Growth
Thousand Metric Tons
46
U.S. Supply Balance
Million Metric Tons
Cement Consumption
Clinker Consumption
47
U.S. Supply Gap
Million Metric Tons
48
Regional Absorption Ingredients

• Demand Growth
• Import Reduction
• Changes in Outside Region Domestic Feed
• Capacity Retirements
• Utilization Rate Reductions
• Planned Unplanned
• Assumes Sustained Economic and Market Growth.
• No Cyclical Downturn
• Timing of Supply Adjustments Orderly?

Five Year Period of Adjustment
49
Canadian Update
50
Canadian Update

• Overall Performance Indicators Remain Solid
• Employment/Income Growth Supporting Domestic
  Demand
• The C remains in an elevated state
• Hampering trade
• Keeping Inflation in check
• Keeping interest rate increases muted
• Residential Construction Markets Fluid
• Eastern provinces continue to soften
• Western provinces balancing the scale
• Nonresidential Construction Emerging
• Vacancy rates declining
• Central provinces retooling to remain competitive
• Engineering Construction
• Hotter in the West than East
• Corporate profits and tax revenue filling federal
  coffers

51
Provincial Update

• Atlantics
• Employment growth will remain slow
• Out-migration and rising interest rates dampening
  spending and housing activity
• Nonresidential permit activity gaining momentum
• Oil and mineral economy will fuel growth
• Quebec
• Industries adjusting to energy and exchange rate
  shocks
• Nonresidential activity lagging
• Residential will continue to weaken
• Ontario
• Automotive sector sensitivity pressuring growth
• C may have worked its way thru the economy
• Residential slipping quickly

52
Provincial Update

• Prairies
• In-migration has gone vertical
• Tight labor markets
• Wage and raw materials cost pressures
• Skilled and unskilled labour shortages
• Residential advanced faster than expected
• Nonresidential permit growth setting positive
  platform
• Likely upward adjustment to overall outlook
• British Columbia
• Risk is an economic overheating
• Residential boom stressing affordability
• Olympic pressures will start soon
• Labor and materials pressures setting cost
  over-runs
• Permit strength likely to influence an upward
  adjustment in nonresidential construction

53
Construction Cement Outlook 2006

• PCA Joint Meeting
• March 8, 2006
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist
• Awarded Most Accurate Forecaster (GDP) by Chicago
  Federal Reserve