cement outlook: 2009-2014

1. Cement Outlook: 2009-2014 Ed Sullivan, Chief Economist PCA

3. Introduction: Overview Economic fundamentals are improving. Conditions remain weak. Recovery will be gradual Strong-Moderate Growth still a year away. Private Sector no longer drives demand Residential & Nonresidential recoveries are not expected to materialize anytime soon. Recoveries: Residential 2011, Nonresidential 2012 Outlook shaped by policy actions. State fiscal conditions sterilize ARRA impacts ARRA reveals bureaucratic delays Tilts impact even more so to 2010-2011

4. Portland Cement Consumption Thousand Metric Tons ==

5. Capacity Expansion: Delays

6. Introduction: Conclusions Stimulus will provide some relief beginning in 2010�. �but hardship facing the industry will not be avoided� Utilization rates do not top 80% until 2012.

7. Fall Forecast Adjustments Downward Adjustments, Upside Risks

8. Bottom Line: Forecast Assessments Macroeconomic forecast has performed extremely well. Construction forecast has performed very well. Cement forecast has consistently under estimated depth of decline. How can this be? Intensity declines PCA forecasted worst decline in intensity in history. Double the decline experienced during 1980-1984 incorporated into forecast. It should have been triple the decline.

9. U.S. Cement Intensities(MT / Million Real 1996$ Construction Spending PIP)

10. Bottom Line: 2009 Forecast Adjustments Weak Economy Real GDP = -3% Job Loss = 4.5 million Construction Spending - 15.5% ARRA delayed but some impact in 3rd/4th quarters. Large declines in nonresidential - 14.5% Residential bottoms Cement Intensity - 6.9% Cement Consumption: -22.0%

11. Bottom Line: 2010 Forecast Adjustments Tepid Economic Recovery Real GDP = +1.3% Job Creation = 648K Construction Spending + 0.1% ARRA impacts materialize. State and Local offsets bottomed Large declines in nonresidential - 22.5% Residential marginal recovery Cement Intensity Recovers + 10.6% Cement Consumption: +10.9%

12. Bottom Line: Forecast Risks Unlike each of the forecasts of the past four years, the forecast contains upside risks. ARRA funding is in place. Timing of its release is issue. Attitude of �I haven�t seen it yet� leads to incorrect conclusion �It won�t have any impact in 2010-11� Low cement intensities associated with high resurfacing share of ARRA spending are assumed. Discretionary state spending will not sterilize ARRA impacts completely. Discretionary highway spending has accounted for roughly 10-13 MMT decline in cement volume since 2007. Has potential sterilization impact run its course? Intensity will rebound adding to cement volume. Timing issue for out years of the forecast. Existence of Pent-up demand?

13. Economic Outlook The recession is over�BUT�not for you

14. Economic Adversity Abates Mid-2010

15. Critical Conditions Required for Sustained Strong Economic Growth Labor market recovery, ease in lending standards

16. The turning point for private construction activity is largely determined by the timing and magnitude of Job growth. Labor markets are improving at a gradual pace. Roughly in-line with PCA expectations. Job growth returns by end of 2nd quarter 2010. After a short Saddle point . Job creation approaches 3 million in 2011 and 2012. Employment remains below pre-recession levels at end of 2012. Work hours and temp hiring precedes job growth. No evidence of this materializing. Job outlook may be ambitious.

17. Job Recovery: Past Recessions - Change, Thousands of Jobs

18. The turning point for private construction activity will also be determined by the timing and magnitude of an Ease in lending standards. No easing until it is clear risks in lending have diminished. THIS IS NOT A CAPITAL ISSUE, IT�S A CREDIT AND RISK ISSUE Job creation, real estate prices must stabilize before risks ease. Near term foreclosure rates accelerate. Credit easing will not be synchronized across all sectors. Residential lending risks decline first. Easing 6 months after job creation begins. Pattern of rising home prices sustained by mid-2010. Nonresidential lending risks decline second. Nonresidential write-offs accelerate through 2011. Longer time lags for recovery in nonresidential fundamentals. Nonresidential price conditions weaker.

19. Bank Charge-Offs versus Unemployment Rate - % Loans Charged-Off, % Unemployed

21. Economic Outlook The recession is over�BUT�not for you

22. Economic Outlook: Consumers Sustainable, strong consumer spending growth will not materialize until labor markets recover. Job losses and high unemployment rates depress income growth. Consumer sentiment is improving from record low levels. Consumer is now saving. Economic and psychological reasons. Paradox of Thrift

23. Economic Outlook: Investment Declines in Residential softening Becomes a neutral contributor to growth near term Low expected ROI hinders recovery in business investment. Access to credit remains an issue. Business Investment likely to be a significant drag on economic growth for another year. Inventories will add strength�.but probably less than many think

24. Inventory-to-Sales Ratio - Total

25. Economic Outlook: Government ARRA spending has been slow to materialize. Large state and local deficits partially sterilize the ARRA impacts.

26. Economic Growth Outlook

27. The fundamentals of construction activity do not begin to materialize until well after it has been declared �the recession is officially over�. Real GDP growth is at hand�.marking the �end of the recession�. Inventory adjustments. Job growth must be sustained and robust for a nonresidential recovery. Turning point in vacancy rates, leasing rates and expected ROI. Job growth must be sustained and robust for a residential recovery. Forget hype over meager gains in sales pace, inventory improvement. Significant gains in cement consumption will not materialize until 2011. Private sector 2010 improvement in residential cement consumption offset by declines in nonresidential sector. Wait until 2012 before ALL fundamentals in construction are positive. Residential, nonresidential and public. UPSIDE RISK � 2012-2014

28. Residential Outlook Take-off Delayed

29. Residential Factors Sales Pace Labor market slow to recapture jobs. Ease in lending standards slow to materialize. Bank owned properties compete with new homes. First time home buyer credits expire. Inventory Adjustment Foreclosures moratorium over. Labor market stress and resets suggest increase in foreclosure rate Shadow inventories. Trigger Point Lower. Home prices & economic distress suggest potential of lower builder trigger point for months supply.

30. Residential Cement Consumption Thousand Metric Tons ==

31. Nonresidential Outlook Dramatic Declines Ahead, Recovery Begins in late-2011

32. Nonresidential Credit Crisis Revenues down due to rising vacancies and pressure on leasing rates. Defaults increase More than 60% 5 year balloon mortgages. Many loans undertaken during peak years � 2005-06. Loans come due in 2010. More than 20% of financing via MBS. This financial instrument has disappeared.

33. Nonresidential Cement Consumption Thousand Metric Tons ==

34. Public Outlook Fiscal Conditions Worsen, ARRA Impact Delayed

35. State & Local Public Outlook Fiscal conditions will partially sterilize ARRA

36. FY2009 State Deficits

37. FY2010 State Deficits

38. Discretionary State & Local Highway/Street Spending - Millions of Real $ (estimated)

39. �Shovel Ready� Timeline

40. ARRA � Weekly Highway Construction Spending - Dollars (Trend � No Seasonal Consideration)

41. ARRA � Weekly Highway Construction Spending - Dollars (Trend � No Seasonal Consideration)

42. New Highway Bill Assumptions Upside Risks

44. Highway & Street Projections

45. Tracing the Impacts on Highway Cement ConsumptionAnnual Change, Million Metric Tons

46. Public Cement Consumption Thousand Metric Tons ==

47. Intensity Projections Upside Risks

48. U.S. Cement Intensities(MT / Million Real 1996$ Construction Spending PIP)

49. After the Economic Crisis Medium Term Outlook

50. Portland Cement Consumption Thousand Metric Tons ==

51. Cement Outlook: 2009-2014 Ed Sullivan, Chief Economist PCA