Cement Construction Outlook Precast Concrete Association of Virginia

Cement & Construction Outlook Precast Concrete Association of Virginia: Fall Conference September 25, 2008 Dave Zwicke, PCA Regional Economist

The Bottom Line § Near Term Adversity § Economic outlook remains dim. § Adversity may continue longer than expected § No recovery in housing until 2010 § Nonresidential decline slower to materialize…longer recovery § Potential of fiscal crisis at State level brewing

Construction Spending Millions 1996$ Declines Continue Through 2009. Peak (2006)-to-Trough (2009) Decline: -20. 8% -- $-154 billion

Cement Consumption (000) Metric Tons Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) (On a Percentage Basis: Equal to 1980 -82 Recession)

Construction Turning Points 1996=100

Outlook § Double-digit declines in consumption with trough in 2009 § Large capacity increases in the pipeline magnify potential market imbalances § Imports record large, sustained declines § Global demand conditions suggest high freight rates § 2008 bears most of the burden of market imbalance § Inventory levels remain above historical averages n Past peak (2005) not realized until 2014

Economic Outlook

Economic Outlook: Five Factors Sub-Prime Mortgage Payments Financial Crisis Defaults Write-Downs Credit Cards Risk Aversion Defaults Tight Lending Standards Home Price Declines Reliance on Home Equity Gone Tight Lending Standards Commercial, Consumer, homeowner capital access reduced Global Energy Structural Global Realities Gasoline Prices Heating Prices Cost of Business Adds Weakness to Dollar Inflation Energy Prices Fertilizer/Biofuels hit Ag Prices Supply Side Costs Ingrained Expected Inflation Rises Fed Tightens Short and Long Term Interest Rates Rise Labor Markets Slower Economic Growth One Million Job Loss in 2008 Housing Recovery Delayed Nonresidential Declines State Fiscal Crisis Looming Public Declines

Economic Adversity 2006 Sub-Prime Energy Financial Crisis Inflation Labor Markets 2007 2008 2009 2010

States in Recession As of August, 2008 WA MT VT ND OR NH ME MN ID SD NY WI WY MI CT IA PA NE NV MA RI UT IL OH IN CO MD WV CA KS NJ DE VA MO KY NC TN AZ OK NM AR SC MS AL GA At Risk LA TX AK FL HI Source: PCA/Economy. com Recession Growing

The Stage is Set… Unemployment Rate -- % Change Year Ago Source: BLS = Recession

Employment declines … Change in payroll jobs (000) 5 year Average Source: BLS

Employment Declines are Regional July Year-to-date WA MT VT ND OR NH ME MN ID SD NY WI WY MI CT IA PA NE NV MA RI UT IL OH IN CO MD WV CA KS NJ DE VA MO KY NC TN AZ OK NM AR SC MS AL GA Flat LA TX AK FL HI Source: BLS Loss Gain

County Job Growth July Year-to-date Job Growth Job Loss Source: BLS

Housing has been the catalyst… Units (000) Source: Census, S&P Case Shiller Annual Growth

Consumers feel the crunch… Annual Percent Change

Consumer Pessimism Growing 1985=100 Source: Conference Board

Monetary Policy Federal Funds Rate Recession Risks Prompt Fed Rate Cuts Rising Inflation Forces a Policy Reversal Long Recognition Lag By Fed…Forcing More Aggressive Policy Posture

Fiscal Stimulus § Impacts 2 nd half 2008 – 1 st half of 2009 § $150 Billion Rebates § Expected to reduce depth and duration of recession § Fiscal policy may shorten economic downturn and accelerate recovery…but it will NOT AVERT the recession

Energy Prices may offset fiscal stimulus… Unleaded Gas, $ Per Gallon Every 1 Cent Increase at the Pump Takes $1 Billion Out of Consumer’s Pockets on an Annualized Basis Since January 1 st, Gasoline Prices have increased $1. 23 cents = Equating to a $120 Billion Annualized Draw on Consumer Spending Source: Department of Energy

Economic Growth Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” Avoided or Short Lived – Distress Continues well Into 2009.

Residential Construction

Cement Composition - Virginia 2005 Colum n 1; 3 rd Qtr; 39% 2009 Sales; 3 rd Qtr; 49, 0% Colum n 1; 1 st Qtr; Colum 41% Sales; 2 nd Qtr; 24, 4% n 1; 2 nd Qtr; 20% Public Sales; 1 st Qtr; 26, 6% Residential Nonresidential

Mortgage Rates Composite contract rate % Fed began cutting rates Easy Credit Period

Foreclosures on the rise… % of loans 90 days past due, SA Source: Mortgage Bankers Association

Foreclosures are concentrated… Below U. S. Near U. S. Above U. S. Source: Equifax, Economy. com % of households defaulting on their 1 st mortgage, 08 Q 1 US: 1. 8%

Home Prices will stabilize in late 2009 Existing Single Family Homes High Inventories Will Depress Prices Throughout 2008

National Housing Starts 000 Units

States Most at Risk to Residential Weakness Residential Share of Total Cement Consumption DELAWARE FLORIDA NORTH CAROLINA GEORGIA VIRGINIA SOUTH CAROLINA MARYLAND NATIONAL WEST VIRGINIA Source: PCA 51. 6% 47. 0% 40. 1% 38. 8% 36. 1% 33. 0% 31. 7% 30. 2% 28. 6%

Virginia Housing Market Annual % Change -- Single Family Median Home Source: National Association of Realtors

Single Family Housing Annual Percent Change

Metro Home Prices Percent Change Year Ago, June 2008 (3 MA) Source: Case Shiller

Residential Cement Consumption - Virginia 000 Metric Tons

Nonresidential Construction

Nonresidential Construction n Nonresidential Strength in 2006 -2007 § Favorable ROI supported by active investment environment § Pent-up Commercial Demand § Easy Credit Conditions n Nonresidential Softening in 2008 -2009 § ROI Softens With Overall Economic Weakness § Credit Conditions Tightening § Risks and Uncertainty Grow

Nonresidential Construction Annual Percent Change Dodge Data Has Already Signaled a Decline

Financial Liquidity Sub Prime TED Spread – Difference between 3 m T-Bill & LIBOR

Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards Easy Credit Period Medium to Large Firms Small Firms Sub-Prime Has Spilled into Commercial Credit Markets

Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes Business Leaders Confidence Index has declined 23% during past year.

Nonresidential Construction n 2007 Momentum is Burning Off § Measured by PIP, Nonresidential Outperformed PCA Expectations. n But, Cement Intensities Declining § Evidence that a retraction in nonresidential lies ahead n Fundamentals Deteriorate…Longer Recovery § Larger declines of 2009

Nonresidential Cement Consumption - VA 000 Metric Tons

States Most at Risk to Credit Crisis Nonresidential Share of Total Cement Consumption WEST VIRGINIA MARYLAND NORTH CAROLINA NATIONAL DELAWARE GEORGIA FLORIDA SOUTH CAROLINA Source: PCA 24. 7% 21. 2% 20. 8% 18. 5% 17. 5% 15. 0% 14. 3% 11. 4%

Office Vacancy Rates – U. S. Percent Vacant Source: CB Commercial

Office Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q 2, 2008 Q 2, 2007 Source: CBRE

Office Cement Consumption - Virginia Metric Tons

Industrial Vacancy Rates – U. S. Percent Vacant Source: CB Commercial

Industrial Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q 2, 2008 Q 2, 2007 Source: CBRE

Industrial Production – U. S. Institute of Supply Management Index Source: CB Commercial

Industrial Cement Consumption - Virginia Metric Tons

Public Construction

Cement Composition - Virginia 2005 Public 2009 Residential Nonresidential

State Fiscal Conditions $49 Billion Shortfall in 2009 Projected Budget Gaps WA MT VT ND OR NH ME MN ID SD NY WI WY MI CT IA PA NE NV MA RI UT IL OH IN CO MD WV CA KS NJ DE VA MO KY NC TN AZ OK NM AR SC MS AL GA Deficit LA TX AK FL HI Source: PCA/Center on Budget and Policies Priorities Surplus

States Most at Risk of Budget Shortfalls Public Cement Consumption Share of Total SOUTH CAROLINA NATIONAL MARYLAND WEST VIRGINIA GEORGIA VIRGINIA NORTH CAROLINA FLORIDA DELAWARE Source: PCA 52. 8% 51. 2% 47. 8% 46. 4% 46. 0% 42. 9% 41. 1% 38. 6% 30. 0%

Other Public Cement Consumption - VA Metric Tons 2008: -14. 2% 2009: -8. 2% 2010: +4. 4% 2011: +7. 8%

Other Public Cement Consumption - VA Metric Tons 2008: -14. 2% 2009: -8. 2% 2010: +4. 4% 2011: +7. 8%

Market Dynamics

Total Cement Consumption - Virginia 000 Metric Tons 2008: -12. 0% 2009: -9. 3% 2010: +2. 8% 2011: +9. 3%

Virginia Metro Markets User Group Residential Nonresidential Public DC Metro 33% 21% 46% Norfolk 34% 16% 50% Richmond 42% 14% 44% Source: PCA Market Research

Direct Shipments Survey - Virginia User Group 2005 2006 2007 Ready-Mix 64% 74% Street & Highways Contractors 6% 6% 3% Building Materials Dealers 1% 5% 4% Pre-Cast 12% 14% All Other 9% 6% 3% Brick & Block 7% 4% 1% Concrete Pipe 1. 5% 1. 4% 1. 3% Source: PCA Market Research

Take a Step Back…

Long Term Cement Consumption 000 Metric Tons

Long Term Cement Conclusions n Growth Outlook Favorable n n n Discount current short-term business cycles Population and economic growth support consumption “Green” advantages of concrete will add to demand

Cement & Construction Outlook Precast Concrete Association of Virginia: Fall Conference September 25, 2008 Dave Zwicke, PCA Regional Economist