Cement Outlook 2007 IEEE Meeting Charleston South Carolina

Cement Outlook: 2007 IEEE Meeting Charleston, South Carolina Ed Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve

Economic Comfort Index * 1996=100 Most Favorable Economic Conditions Since the 1960’s • Combines Real GDP With the Levels Interest Rates, Inflation and Unemployment

Bottom Line n Economic Growth Slows to 2. 4% (Real GDP) n Construction Declines = – 3% n Housing Starts Decline = -18% n Cement Consumption Declines = -1. 5% n Downside Risks Increased

Economic Outlook

Economic Outlook n Economic Fundamentals Sound n Unemployment, Inflation, Interest Rates Low n Current Strength Cushions Against Downside Risks n Past Growth of 3. 3% is Unsustainable

Economic Outlook n Consensus 2007 GDP Forecast: 2. 7% n 2006 Real GDP Growth: 3. 3% n 1 st Quarter: 5. 5% 2 nd Quarter: 2. 6% 3 rd Quarter: 2. 0% 4 th Quarter: 2. 2% 1 st Quarter 2007: 1. 3% n Past Four Quarter Average: 2. 0% n n n What is going to Propel Growth Beyond the Past Four Quarter Average?

Economic Outlook n What is going to Propel Growth Beyond the Past Three Quarter Average? n Budget Deficits Prevents Government Spending from Being the Growth Driver. n Housing Contraction Prevents Investment Spending from Being a Growth Driver. n Net Exports are Improving. Sector So Small In Context of Overall Economy Prevents this from Being a Growth Driver. n That Leaves Only Consumer Spending.

Snap Shot of Economic Activity Consumption acts as the anchor for US economic activity. Any retrenchment in consumer spending will lead to slower economy-wide growth rates

Economic Outlook n That Leaves Only Consumer Spending. n To Reach 2. 7% Consensus Real GDP Growth…. n Consumer Spending Must Grow at a Rate of More than 3. 5%. n During Past Three Quarters, Consumer Spending Averaged 3. 2% Growth. n And…

Economic Outlook n Consumer Spending has Relied On Debt. n n Consumer Debt Burdens Near Historical Highs n n Net savings rate has been negative for years. Often a precursor to reduction in consumption growth. Sub-Prime Defaults Force a Tightening in Lending Standards n Reflects a new assessment of risk-return philosophy – beyond mortgages and perhaps globally. n Tapping Home Equity Not as Viable As In the Past n Can Debt Based Consumer Spending Thrive In This Environment? n n If not, growth in consumer spending slows. Income Growth is Improving – but perhaps not fast enough.

Consumer Worksheet n Pay Increase Averages 3. 5%. n Health Insurance Premiums Rise 7%-11%. n State and Local Property Taxes Rise. n n Reassessments based on high home appreciation Energy Prices Take a Large Bite. n Even in context of recent improvement. n Inflation Running near 2. 5% n Tapping Home Equity Not as Viable As In the Past n Slowdown in Job Creation – 180 K Per Month is Not Sustainable. n If Job Creation Drops Below 100 K on Sustained Basis – Expect a Significant Downward Revision in Forecast.

Economic Outlook : Real GDP Growth Real GDP Annual Growth Rate 2006: 3. 3% 2008: 2. 4% Consensus 2007: 2. 7% Fed Eases 2007: 2. 4% 2005: 3. 5% -----2005 -------2006 -------2007 -------2008 -------

Housing Threat Real threat to economic growth not the decline in housing…. . But…. . The way we financed the past boom… And… Its impact on consumer spending…. . Potentially more profound in history

Growing Home Price & Income Gap Annual Growth Rate Comparison Home Prices Household Income

Emergence of Exotic Mortgages Interest Only Loan Share of Sub-Prime Market Share by Loan Count: Striped Yellow Share by Principle Balance: Solid Green Note: Sub-Prime accounts for 36% total mortgage market

Sub-Prime Mortgage Resets Total Loans Scheduled for Reset Period of Emerging Trouble

Impact on Economic Growth n Monthly Payments Increase 50% or More. n Credit Card Debt Increases As Consumers Try To Preserve Standard of Living. n Delinquencies Increase. n Defaults Increase. n Adverse Impact on Consumer Spending.

Delinquency Rates Percent of Loans Delinquent Auto Total Mortgage Rising Delinquency Implies Bleeding May Be Materializing. If Defaults in Mortgages Rise, Foreign Inflow of Funds to MBS May Ebb – Rise in Interest Rates

Impact on Economic Growth n Adverse Impact on Consumer Spending can be Contained. n As Long As…. n Relatively Strong Job Growth Persists. n And… n Interest Rates Remain Stable.

Risks n Sub-Prime n Foreign Capital Inflows n Skepticism On Labor Market’s Ability to Continue to Generate 180 K Net New Jobs Monthly n Risks Elevated: One in Three Chance For Downside Correction n Survey of Economists: Risk of Recession = 27%

Construction & Cement Outlook Overview

Total Construction Billion 1996 $ 2007: Decline projected …BUT. . based off record levels

Changing Composition of Construction Spending Growth 2006 -2009 2001 -2005 Low Interest Rates, Weak Economy n Growth Leader: Residential n n n State Tax Revenues Hurt by Anemic Economic Growth Laggard: Nonresidential n n Low Interest Rates Public n Rising Interest Rates, Strong Economy Weak Economy Growth Leader : Nonresidential n n Public n n Strong Economy State Tax Revenues Recovery Due to Strong Economic Growth Laggard : Residential n Rising Interest Rates

Risk to Baseline Construction Worst Case Scenario PCA Scenario Exotic Market 1, 782, 000, 000 Default Rate 30. 00% 6. 00% 2, 227, 500 445, 500 0. 3% 2. 4% Homes Into Default GDP Growth Government Intervention Will Materialize Well Before 30% Default Rate

Composition Of Cement Growth: Construction Activity Vs Cement Intensity Growth Annual Percent Change, Real Put-In-Place Construction & Cement Intensity Construction Activity Growth Cement Intensity Growth

Reasons for Cement Intensity Gains n Competitive Price Position Vs Other Building Materials n n n Composition of Construction n n Type of construction differs on downside and upside of business cycle. Construction Stronger in Southern States n n Gains associated with strengthening of higher intensity construction sectors Nonresidential Intensities are Cyclical n n Compare from 2000 Large advantage – Even with recent declines in steels and increases in concrete. Generally higher intensities in Southern states Green Construction & Promotion

Portland Cement Outlook Thousand Metric Tons Growth Slows When One of Three Sectors (Residential, Nonresidential & Public Declines) 2006 – 2007: A Pause Before A Resumption in Growth

Import Outlook 2007 Worksheet n Consumption = 1. 5% Decline n Domestic Utilization = Same as 2006 (94%) n Inventory = 19 Days Supply n n 770 K Draw Note: Added 1. 1 Million MT in 2006 n Imports 2007 = 33. 1 MMT (-7. 8 %) n Downside Risks

Market Balances: Trend Adjusted Supply Vs Consumption Inventory Adjustment Green: Domestic Yellow: Imports Green: Inventory Red: Day Supply

Long Term Outlook

US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Demographics: 2005 -2030 n Population Adds 65 Million Persons n Adds 9. 1 Million School Age Persons n Education Construction n Adds 34 Million Retirement Age Persons n n Medical Adds 31 Million Households n Housing, Retail & Infrastructure.

Highway Lane Miles Thousands of Miles Just to Maintain Current Highway Congestion Levels, Federally Aided Highways Must Expand Nearly 25% by 2030. . Given 49 Million Additional Licensed Drivers.

Share of U. S. Population Growth 2006 -2030 (Percent Share of Total) Total U. S. Population Growth: 65 Million Persons Note: 47% of Total Population Growth Occurs in California, Texas and Florida 10% + Source: U. S. Bureau of Census 3% to 10% 1% to 3% 0% to 1% Share

Cement Consumption Per Capita Tons Persons Per Capita Consumption Expected to Grow 32% 20052030…Compared to Nearly 39% in Previous 25 Year Period

Cement Consumption: Long Term Million Metric Tons

Feeding the Beast: U. S. Plant Expansions: 2007 -2010

U. S. Capacity Growth Thousand Metric Tons 2006 -2010: Industry Expands by More Than 20% - Adds 24 MMT of Capacity

U. S. Capacity Growth: Financial Investment History Estimated, Thousands 2005 Dollars 2006 -2010: Industry Invests $5. 4 Billion in Plant Expansion

Share of U. S. Plant Expansion 2007 -2010 (Percent Share of Total) Total U. S. Capacity Expansion: 24. 2 Million Metric Tons Note: 47% of Total Population Growth Occurs in California, Texas and Florida 10% + Source: PCA 5% to 10% 3% to 5% 1% to 3% 0% to 1% Share

Capacity Utilization Vs Import Share “Swing Supply Strategy” Capacity Utilization Consumption will Grow Utilization Rate Reductions Import Reductions Rationalization Import Share Market Digests New Capacity

No New Domestic Plant Expansion Scenario* *Current Expansion Plans Included

U. S. Supply Balance: No New Capacity Expansion Plans Million Metric Tons Imports Cement Consumption Clinker Production Assumes No New Capacity: 2011 -2030

U. S. Cement Imports: No New Capacity Expansion Plans Million Metric Tons US Domestic Capacity Expansion 2030: 84 MMT New Capacity Requires Increased Import Supplement 2012

New Import Terminal Investments: Timing Assessments No New Domestic Plant Expansion Scenario n Domestic Capacity Expansion Reduces Imports n n Utilization for Import Terminals Declines n n 2012 -2030 Utilization at Import Terminals Increase n n 2007 -2011 Demand Outpaces Capacity Expansion and Requires Import Supplements n n 2007 -2011 2012 -2015 Expansion in Import Terminals Required n 2016 -2030

U. S. Import Terminal Growth: No New Plant Expansion Plans Number of New Terminals, 660 Throughput, 2005 Capacity = 40 MMT US Domestic Capacity Expansion Delays Need for Additional Import Terminals Until 2016 To Reach 84 MMT of Imports: Equates to More Than 4 New Import Terminals to be Built Every Year Between 2016 -2030* * Assumes Current Capacity = 40 MMT, No Gains in Productivity, All Expansion Comes From New Terminals

U. S. Import Terminal Investment: No New Capacity Expansion Plans Million 2005 Dollars US Domestic Capacity Expansion Delays Need for Additional Import Terminals Until 2016 To Reach 84 MMT of Imports: Equates to More than $860 Million In Import Terminal Investment * * Assumes Current Import Terminal Capacity = 40 MMT, No Gains in Productivity, All Expansion Comes From New Terminals

Import Scenario: Problems n Foreign Supply n U. S. Held Captive to Global Conditions n Freight Rate Pressures Continue n Marginal Growth in Handymax Ships n Port Congestion and Capability of Deep Ports for Panamax Ships

Constant Import Share Scenario

U. S. Supply Balance: Constant Import Share Scenario Million Metric Tons Cement Consumption Clinker Production

Cement Industry Investments: Timing Assessments Constant Import Share (27%) Scenario n Domestic Production Assumed at 90% Capacity Utilization n n Domestic Capacity Expansion Reduces Imports n n 2007 -2011 (Sub 27% Share) Demand Outpaces Capacity Expansion. n n n 2007 -2011 Utilization for Import Terminals Declines n n 2007 -2030 Utilization at Import Terminals Increase and Higher Plant Utilization 2012 -2015 Expansion in Import Terminals and New Plants Materialize n 2016 -2030

U. S. Imports: Constant Import Share (27%) Million Metric Tons Cement Consumption

U. S. Capacity Growth: Constant Import Share (27%) Thousand Metric Tons To Reach 142 MMT of Domestic Production: Equates to One 2 MMT Plant Per Year 2015 -2030 * * Assumes Capacity 2010 = 110 MMT, No Gains in Productivity, Expansion Comes From New Plants

U. S. Capacity Growth: Constant Import Share (27%) Estimated Investment, 2005 Dollars To Reach 142 MMT of Domestic Production: Equates to More than $37 Billion In Plant Investment 2015 -2030 * * Assumes Capacity 2010 = 110 MMT, No Gains in Productivity, Expansion Comes From New Plants, $225 per Ton Capacity

U. S. Import Terminal Growth: Constant Import Share (27%) Number of New Terminals, 660 Throughput, 2005 Capacity = 40 MMT

Total Cement Industry Investment: Constant Import Share (27%) Estimated Investment, 2005 Dollars * Assumes Capacity 2010 = 110 MMT, No Gains in Productivity, Expansion Comes From New Plants

Domestic Expansion Scenario: Problems n Permits n Construction Costs n Climate Change n Other Logistics

Conclusions

Cement Outlook: 2007 IEEE Meeting Charleston, South Carolina Ed Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve