U.S. Construction

1
U.S. Construction Cement Outlook 2006

• World of Concrete
• January 17, 2006
• Las Vegas, Nevada
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist

2
Key Points of Analysis
U.S. Economic Outlook
Residential Nonresidential Public
Construction Outlook
Demand Operating Conditions
Cement Outlook
3
U.S. Economic Outlook
4
Economic Growth Stronger 2006?

• Consensus of Forecasters Fast Recovery
• Rebuilding Activity 1st Quarter and Beyond
• Elevated Energy Prices Dissipate Quickly
• Stronger Growth for 2006
• PCA No Significant 1st Quarter Rebuilding
• Long Clean-Up Period
• Begins 2nd Half 2006
• Distributed Over Five Years
• Weathers Second Punch Severity of Winters Cold
  
• Colder .larger adverse impact of higher energy
  prices
• Implies adverse impact last through 1st Quarter
  and into 2nd
• PCA Weaker 2006 Growth
• Particularly 1st Half 2006
• Weaker Nonresidential Construction

5
Economic Growth Conclusions

• Foundations for Growth Firm
• Sustained job growth.
• Moderate growth, below 2004 2005
• Consumption Growth Slows 2006-2007
• Energy Impact Home heating
• Greater pricing traction
• Credit Cards
• Adjustable/Exotic Mortgage Re-adjustment.
• Hurricane Reconstruction Mid-Year
• 2006 Boost to home construction muted

6
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-------
7
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

8
Construction Cement Outlook

• Overview

9
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
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Cement Intensities
11
Cement Growth 2004 Composition
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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
• Nonresidential Intensities are Cyclical
• Type of construction differs on downside and
  upside of business cycle.
• Construction Stronger in Southern States
• Generally higher intensities in Southern states
• Code Changes
• Code Changes in Aftermath of Hurricane Andrew
• New Orleans Elevation Codes (North Carolina)
• High Energy Prices Mixed Positive

13
Residential Construction Single Family
14
Mortgage Rate Outlook
Annual Growth Rate Comparison
Avoidance of Bubble Burst Based on Gradual
Modest Increases in Mortgage Rates
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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

16
Mortgage Environment Risks

• 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?

17
Inventory Draw Required
Homes on Market/Monthly Selling Rate
Inventory Draw Required
Ten Year Average
Inventory Build Required
18
Single Family Housing Starts
(000) Units
Growing Downside Risks
19
Nonresidential ConstructionOverview
20
Nonresidential Construction Activity
Percent Change, Real Put In Place 1996
21
Key Nonresidential Assessments

• Underlying Nonresidential Drivers Improving
• Turning Point Already Achieved In Several Key
  Sectors
• Despite Large Percentage Gains for 2006, Most
  Markets Weak From Historical Perspective.
• Increasing Cement Intensities Reinforce
  Construction Activity Gains.

22
U.S. Nonresidential Construction
Billion 1996

23
Fall 2005 Forecast Nonresidential Cement
Consumption
(000) metric tons
Recovery Remains In Place New Economic Scenario
Takes Some Steam Out of National Recovery Pace
24
Public Construction
25
Public Construction OutlookState Local Share
of Public Construction
Percent of Total Public Construction Spending
26
Public Construction Outlook State Deficits
Billion State Surplus/Deficit, NIPA

27
Public Construction Conclusion

• Improving state fiscal picture
• Outlook Dimmed Slightly With New Federal Budget
  Plans
• Release of pent-up public construction
• TEA
• Public cement demand strong.

28
Market Conditions
29
Pre-Katrina Cement Supply Survey
No Shortage
Tight Supplies
Spot Tight Supplies
30
Current Cement Supply Survey
No Shortage
Tight Supplies
Spot Tight Supplies
31
Supply
32
United States Cement Domestic Production Outlook
(Thousand Metric Tons)
Industry Committed to Expansion 11.5 Million
Metric Tons to be Added by 20102.5 Billion
InvestmentMore Likely
33
Inventory Days Supply
Inventory/Daily Selling Rate
Average 19
34
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.

35
Imports
36
International Freight Rates
Per Ton
Slack Markets, Easy Availability
37
Fall 2005 Forecast Import Volume
(000) metric tons
Improving Global Conditions Imply Upside Bias
38
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

39
US Anatomy of Growth
2001 Total 108.1 MMT Residential 25.9 MMT
(24) Nonresidential 24.8 MMT
(23) Public 51.4 MMT (48)
2005 Total 120.7 MMT (5.2,2005) Residential 38.
4 MMT (32) Nonresidential 19.2 MMT
(16) Public 54.8 MMT (45)
2009 Total 134.9 MMT Residential 31.5 MMT
(23) Nonresidential 27.1 MMT
(20) Public 67.2 MMT (50)
12.6 MMT 12.5 MMT -5.6 MMT 3.3 MMT 2.3
MMT
14.2 MMT -6.9 MMT 7.9 MMT 12.5 MMT
40
U.S. Construction Cement Outlook 2006

• World of Concrete
• January 17, 2006
• Las Vegas, Nevada
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist