Construction

1
Construction Cement Outlook

• Financial and Administrative Executives Committee
• August 2, 2005
• Montreal, Quebec Canada
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist

2
Bottom Line Conclusions

• Economys Growth Rate Slows 2005-2006
• Foundations for Growth Firm
• Threats to Scenario are Distant
• Construction Sector Sustained Growth
• Housing Strong
• Nonresidential Recovery Already Underway
• Public Turnaround Near
• Cement Industry 2004 Conditions Sustained
• Construction Growth Amplified By Intensity
  Gains
• Plant Capacity Utilization Remains Stretched
• No Near Term Relief for Tight Inventory
  Conditions
• Imports Remain Key Supply Feed to Market

3
Key Points of Analysis
U.S. Economic Outlook
Demographic Outlook
Residential Nonresidential Public
U.S. Construction Outlook
Demand Operating Conditions
Cement Outlook
4
U.S. Economic Outlook
5
Economic Growth Conclusions

• Growth Rate Slows 2005-2006
• Consumer and Investment sector slowdown.
• Less stimulative Fiscal policy.
• Tightening of Monetary Policy.
• Net Exports sustained drag.
• Foundations for Growth Firm
• Sustained job growth.
• Moderate growth, below 2004 level of 4.4 RGDP
• Threats to Scenario are Distant
• Twin Deficits

6
Importance of Key Economic Sectors
7
Consumer Outlook
8
Source of Funding Debt Financed Consumer
Spending
Percent of Total Mortgages Going to Refinance
130 Billion Cashed Out in 2004 Supports
Consumer Spending
9
Source of Funding Job Growth
Payroll Survey Monthly Net Job Creation,
Thousands of Jobs
2005 2.0 Million Net Job Creation, 2006 2.2
Million Net Job Creation 937,000 Created in First
5 Months
10
Willingness to Buy ImprovingConsumer Sentiment
Index
9/11
Iraq War Begins
Strong Economic Fundamentals Support Recovery
11
Consumer Spending Outlook
Favorable Factors
Unfavorable Factors
Job Creation Affordability Consumer Spending
Confidence
No Tax Stimulus Less Home Refinancing
Activity High Oil Prices Rising Interest
Rates Growth in Mortgage ARMs Slower
Automotive Spending
Strong, But Slower Consumer Spending Growth
12
Investment Spending
Annual Percent Change
13
Corporate Profits Recovery
Billions of Dollars, Seasonally Adjusted at
Annual Rate
Source Bureau of Economic Analysis
14
Economic Outlook Real GDP Growth
Real GDP Annual Growth Rate
2004 4.4
2006 3.3
2003 3.1
2005 3.5
----------2003----------
-------2004-------
-------2005------
-------2006-------
15
Investment Spending Outlook
Favorable Factors
Unfavorable Factors
Higher Expected ROI Lower Cyclical Risk Pent Up
Demand Release Higher Profits Internal
Funds Low Interest Rates External Funds Lower
Risk Premiums
Tax Stimulus Expired 2004
Strong But Slower Investment Spending Growth
16
Economic Policy
17
Federal Deficit Percent of Total GDP
Percent, Federal Deficit/GDP
Balanced Budget
2004 Deficit 400.7 Billion
Deficit Projections 2005 -350 Billion, 2006
-280 Billion, 2007 -250 Billion, 2008 -225
Billion
18
Federal Funds Rate Outlook
Federal Funds, Yellow Line
(Restrictive Stance)
(Accommodative Stance)
Fed Gradualism 6 Hikes 25 BP Each
2005 Six 25 BP Increases
19
US Construction Outlook
20
Total ConstructionBillion 1996
21
Changing Composition of Construction Spending
Growth
2005-2008
2001-2004
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
22
Residential Construction Single Family
23
Residential Conclusions

• Mortgage Rates Remain Low Through Early 2006
• Threshold Rate of 6.5 Not Reached Until 2006
• Strength Continues Through 2005
• Lean Inventories, Builder Reactions Delay
  Slowdown Even When Rates Rise
• Housing Extends Strength
• Even After Sustained Declines (2006-2009) SF
  starts still strong from Historical Perspective.

24
Single Family Construction Mortgage Rates
Mortgage Rates, 30 Year Conventional
Tripping Rate 6.5
25
Single Family Construction Building Starts
26
Residential Construction Multi Family
27
Multi-Family Composition
Total Multi-Family
Rentals
Condos
2005/6 Adverse begins to Turn Late-2005/2006
2005/6 Positive begins to Turn Late-2005/2006
28
Multi-Family Cyclical Assessments Vacancy Rates
Remain High
Vacancy Rates, Percent Vacant
29
Multi-Family Rental Prices Soft
Average Rental Prices
Net of Landlord Discounts Rents Decline 13 2004
30
Multi-Family Cyclical Assessments Vacancy Rates
Slowly Improving
Vacancy Rates, Percent Vacant
2004 10.2, 2005 9.6, 2006 8.6, 2007
8.1, 2008 7.6
31
Nonresidential Construction
32
Nonresidential Construction Activity
Percent Change Real Put In Place 1996
33
Nonresidential Recovery
34
Nonresidential Conclusions

• Nonresidential Activity on Increase
• Segment Recovery Within Sector Differ
• Retail, Hotel Industrial Lead
• Institution Office Lag
• By end of 2006. All segments in Growth

35
Nonresidential ConstructionRetail
36
Retail Construction Outlook
Billion 1996

2004 39.4 Billion, 2005 42.9 B, 2006
46.1 B, 2007 48.9 B, 2008 51.0 B
37
Retail Conclusions

• Sustainability of consumer spending growth widely
  expected
• Raises expected ROI for retail stores.
• Corporate profitability improves
• Chains re-commit to pre-911 expansion plans.
• Housing expansion
• High single family appreciation rates stretch
  suburban sprawl.
• Retailers locate close to new and emerging
  outer-suburban markets.
• Lagged response.
• High retail construction growth rates.
• Compared to depressed period.
• Past peaks not surpassed until late in forecast
• PCA Upside Risk

38
Nonresidential ConstructionIntensities
39
Converting to Cement Consumption Hotel Intensity
Average Tonnage Per Real Put-In-Place Lodging
Construction
Assumes High Steel Prices Competitive Price
Advantage of Concrete is Sustained
40
Understanding Hotel Intensities
Ratio Low-to-High Hotel Cement Consumption
(Green, Right), Hotel Intensity (Yellow, Left)
Cyclical Demographic Factors Influence Ratio of
Low to High Rise Office Buildings
Trend
Office Cement Intensities Impacted by Ratio of
Low Vs High Rise Hotels Low Rise Tend to be More
Concrete Type, Low More Cyclical (Shorter Leads)
41
Public Construction
42
Public Construction OutlookState Local Share
of Public Construction
Percent of Total Public Construction Spending
43
Public Construction Conclusion

• Improving state fiscal picture
• Outlook Dimmed Slightly With New Federal Budget
  Plans
• Release of Pent-up Public Construction
• 2000-2003 Postponed Projects
• TEA
• Public cement demand strong.
• Gains strength as each year passes

44
Public Construction Outlook State Deficits
Billion State Surplus/Deficit, NIPA

Near Term Optimism, Medium Term Risk
45
Cement Intensity
46
Cement Growth 2004 Composition
47
Cement Intensity Continued Increases

• Favorable Relative Price Conditions
• While concrete prices increased 7.7 during 2004,
  steel prices increased 46.
• Material substitution in design.
• Cyclical Recovery
• Larger, more cement intensive projects typically
  associated with economic recovery.
• Construction Mix
• Outlook favors nonresidential and public
  construction with typically higher cement
  intensity.

48
Demand Conclusions

• Residential Easement Modest
• Mortgage Rate Increases Subdued
• 6.5 Threshold Does Not Materialize Until 2006.
• Lean Inventory Position
• Cement Intensity Gains
• Nonresidential Recovery
• Key Sectors Have Already Turned
• Robust Percentage Gains
• Amplified by Intensity Gains
• Upside Risks
• Public Boom Waiting In Wings
• State Fiscal Recovery
• Pent-up Demand
• TEA-21

49
Cement Supply
50
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
• Supply Constrained Market Until 2008
• Implies downside risks to consumption projections
• No Near Term Relief from 2004 Conditions

51
United States Cement Domestic Production Outlook
(Thousand Metric Tons)
52
Inventory Days Supply
Inventory/Daily Selling Rate
Average 19
53
United States Cement Import Outlook
(Thousand Metric Tons)
54
Bottom Line Conclusions

• Economys Growth Rate Slows 2005-2006
• Foundations for Growth Firm
• Threats to Scenario are Distant
• Construction Sector Sustained Growth
• Housing Strong
• Nonresidential Recovery Already Underway
• Public Turnaround Near
• Cement Industry 2004 Conditions Sustained
• Construction Growth Amplified By Intensity
  Gains
• Plant Capacity Utilization Remains Stretched
• No Near Term Relief for Tight Inventory
  Conditions
• Imports Remain Key Supply Feed to Market

55
Construction Cement Outlook

• Financial and Administrative Executives Committee
• August 2, 2005
• Montreal, Quebec Canada
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist