Cement Outlook 2007 MCA Annual Meeting February 2007
Cement Outlook: 2007 MCA Annual Meeting February 2007 Lake Ozark, Missouri Steven Ko PCA Senior Regional Economist
Key Points of Analysis U. S. Economic Outlook Residential Construction Outlook Nonresidential Public Demand Operating Conditions Cement Outlook Regional Perspective
Economic Outlook : Real GDP Growth Real GDP Annual Growth Rate Risks On Downside: 2008 2006: 3. 1% 2005: 3. 2% -----2005 ----- 2008: 2. 4% 2007: 2. 6% -------2006 -------2007 -------2008 -------
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
Key Near Term Issues n Oil Prices Is the recent rundown sustainable? n Interest Rates Resumption in increases? n Inflation Will it subside enough to satisfy the Fed? n Housing Decline Hard or Soft landing? n Job Creation
Consumer Confidence Index 1985=100 160 130 100 70 40 00 01 02 03 04 05 06 07
Consumer Spending Outlook n Job & income growth n Oil prices, inflation and interest rates n Affordability erosion n Housing & refinancing
Oil Price Outlook n Oil Prices are declining as projected n Strong International Demand n Supply Disruptions Continue n OPEC Actions n 2006: $65. 85 per barrel WTI 2007: $60. 30 $ Per Barrel, West Texas Intermediate
Federal Reserve Policy Actions Federal Funds Interest Rate, Annual Percentage Rate n Overall Economy & Job Growth Slowing n Inflation a growing concern n Dilemma: Inflation or Growth? n Do not count out further Fed Tightening n Risk of Fed over-reaction
Inflation Outlook Annual Percent Change, CPI Urban n Higher Energy Prices Structure n Labor Costs Rising n Structurally Weaker Dollar n Structurally Higher Transportation Costs n 2006: 3. 4% 2007: 2. 7% n Supply Side Inflation
Investment Spending Nonresidential Fixed Investment, Annual Percent Change n Near term outlook remains positive n Fixed, Non-residential investment has recorded strong growth during last two years
Investment Spending Unfavorable Factors Construction Costs Energy Prices Favorable Factors Higher Expected ROI Pent Up Demand Corporate Profits = Internal Funds Low Interest Rates = External Funds Strong, But Slower Investment Spending Growth
Labor Market Outlook Monthly Net Job Creation, Payroll Survey n Job growth slowing n Unemployment rises n Slow down in trend of accelerating wages 2005: +2. 03 Million 2006: +1. 91 Million 2007: +1. 60 Million
Economic Growth Conclusions n Consumption Growth Slows 2006 -2007 n Interest Rates Gradually Rise n Investment Sector Strength Continues n Large Trade Deficit and Federal Deficit Act as Drag on Growth n Foundations for Growth remain
Total Construction Billion 1996 $ Year 2005 3. 7% 2006 1. 1% 2007 -1. 8% 2008 1. 2% 2009 2. 9% 2007: -1. 8% decline projected …BUT. . based off record levels
Single Family Housing Starts (000) Units Growing Downside Risks
Inventory Draw Required Homes on Market/Monthly Selling Rate Highest Level Since 1997 Inventory Draw Required Inventory Build Required Ten Year Average
Mortgage Rate History: 30 Year Conventional Annual Growth Rate, 30 Year Conventional 6. 7% Year End Peak to Trough 294 Basis Point Decline
Growing Home Price & Income Gap Annual Growth Rate Comparison Home Prices Household Income
Sub-Prime Mortgage Resets Total Loans Scheduled for Reset Period of Emerging Trouble
Affordability Index Mountain West North Central East North Central New England Middle Atlantic Pacific South Atlantic West South Central East South Central Affordability Ratio Most Affordable 2 nd Tier 3 rd Tier 4 th Tier Least Affordable
Nonresidential Construction Annual Growth Rate Year 2005 3% 2006 12% 2007 8% 2008 4% 2009 5%
Nonresidential Outlook n Lodging Outlook n Retail Outlook n Health Construction Outlook n Office Building Outlook n Industrial Outlook
Public Construction Outlook Billion $ State Surplus/Deficit, NIPA n 93% of public construction performed at state/local level. n State/Local fiscal problems fading. n Revenue growth improves with economy and job growth. n Highway Bill adds strength n 2006: +4. 8% 2007: +5. 5% n Note: 2005: +1. 9%
Public Construction Outlook: State Deficit Estimates Fiscal Year 2004 Mountain $1. 0 West North Central $. 12 $. 85 New England $0 $2. 4 $. 16 $. 05 $1. 3 $0 $. 36 $38 Pacific $. 41 $3. 6 $. 4 $. 98 $1. 0 $. 2 $0 $. 3 DE $. 2 MD $. 85 $1. 1 $2. 0 $. 22 $. 09 $. 5 West South Central $. 14 South Atlantic $. 6 East South Central District of Columbia $. 4 $. 74 $3. 7 0 -9% $. 25 $2. 0 KEY Dollar figures, in billions, indicate amount states had to save to balance 2004 budget. Deficit as percentage of budget 10 -19% 20 -29% NH $. 15 MA $3. 0 RI $. 17 CT $1. 9 Middle Atlantic $. 75 $1. 7 $. 11 Secondary Sources: Nat’l Conf. of State Leg. , Center on Budget and Policy Priorities, Nat’l Assn. of State Budget Officers, Calif. Budget Project NJ $4. 6 $2. 4 $. 08 $1. 5 Primary Source: Newsweek July 28, 2003 $. 49 $9. 3 $2. 0 $. 38 VT $. 03 East North Central 30 -39%
Public Construction Outlook: State Deficit Estimates Fiscal Year 2005 Mountain $0 West North Central $0 $0 New England $0 $. 19 $0 $. 17 $. 9 $0 $. 34 $. 6 $. 3 $. 6 $. 9 $1. 1 $0 $0 $. 3 $0 $. 71 Primary Source: Center on Budget Policy and Priorities Feb / 04 Secondary Source: National Association of Budget Officers No available data $. 62 $. 9 East South Central Deficit as percentage of budget 10 -19% District of Columbia $. 14 $. 5 South Atlantic $. 5 West South Central 0 -9% $. 93 $. 8 $0 $0 DE $0 MD $. 74 $. 12 $. 2 NH $0 MA $1. 5 RI $. 19 CT $. 2 Middle Atlantic $0 $0 $15 Pacific NJ $5 $0 $2 $0 $. 17 $5. 1 $. 0 $. 21 VT $0 East North Central 20 -29% $0 KEY Dollar figures, in billions, indicate amount states had to save to balance 2005 budget. 30 -39%
Changing Composition of Construction Spending 2006 -2009 2001 -2005 Low Interest Rates, Weak Economy Rising Interest Rates, Strong Economy n Growth Leader: Residential n Growth Leader : Nonresidential n Public: Weak Tax Revenues n Public: Tax Revenues Recover n Growth Laggard: Nonresidential n Growth Laggard : Residential
Portland Cement Outlook Annual Percent Change Growth Rate Yellow Line Thousand Metric Tons Volume, Green Bar
Competitive Materials Producer Price Indexes
Cement Supply Survey Summer 2005 No Shortage Tight Supplies Spot Tight Supplies
Cement Supply Survey Summer 2006 No Shortage Tight Supplies Spot Tight Supplies
Market Balances: Trend Adjusted Supply Vs Consumption Inventory Adjustment Green: Domestic Yellow: Imports Green: Inventory Red: Day Supply
Cement Capacity Outlook Thousand Metric Tons Clinker $5. 0 Billion Committed to Expansion
Imports Flowed Despite Constraints Metric Tons SAAR $/Ton Asia-Gulf 60 45 50 Freight Rates 35 40 30 25 Imports 20 10 15 01 02 03 04 05 06
Key Markets Exposure - Missouri Cement Consumption as % of Total State Cement Consumption n Residential: 31% National: 36% n Nonresidential: 15% National: 17% n Public: National: 47% National: 29% n 54% Highway: 36% Cement per Capita U. S. : . 41 Cement per Capita Missouri: . 49
Residential Cement Consumption Missouri Metric Tons
Nonresidential Cement Consumption Missouri Metric Tons
Public Cement Consumption Missouri Metric Tons
Regional Portland Cement Consumption (Million Metric Tons) 2003 Arkansas %Change Illinois 3. 99 % Change Iowa 1. 72 -1% 7% Kansas 1. 54 %Change Missouri %Change Tennessee %Change 2004 2005 2006 1. 09 16% 3. 99 -3% 1. 84 5% 1. 53 3% 2. 66 7% 1. 88 4% 1. 17 7% 4. 12 -1% 1. 94 -2% 1. 54 -1% 2. 62 -2% 1. 87 -1% 1. 21 3% 4. 09 3% 1. 90 1. 53 1% 2. 83 8% 2. 14 14% -1% 2. 62 -6% 2. 10 -1% 4% 7% 6% 1% 1. 20 -1% %Change U. S. %Change
Real GSP - Missouri Annual % Change U. S.
Employment - Missouri % Change
Population Growth - Missouri % Change
Cement Outlook - Missouri Metric Tons Year 2005 8. 0% 2006 -6. 4% 2007 -0. 5% 2008 2. 7%
Clinker Capacity (000 Metric Tons) Arkansas Illinois Iowa Kansas Missouri Tennessee Region 1995 910 2, 544 2, 409 1, 730 4, 335 978 12, 906 2005 831 2, 770 2, 672 2, 835 5, 169 1, 438 15, 715 Regional Expansions MMT Year Monarch – Humboldt, KS Eagle Materials – La. Salle, IL Buzzi – Festus, MO Continental – Hannibal, MO Ash Grove – Foreman, AR Holcim – St. Gen. , MO . 180. 387. 900. 540. 630 3. 96 ’ 06 ‘ 07 ’ 08 ’ 09 ‘ 09 + 22%
Conclusions n Slower Economic Growth Ahead n Construction Market Flattening n Cement Supply Slow to Adjust to Slower Growth Environment n Slower Growth in Cement Consumption
Cement Outlook: 2007 MCA Annual Meeting February 2007 Lake Ozark, Missouri Steven Ko PCA Senior Regional Economist
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