Cement Outlook: 2007

World of Concrete

Las Vegas, Nevada

Edward J. 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

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

•Combines Real GDP Against the Levels Interest Rates, Inflation and Unemployment

Most Favorable Economic Conditions Since the 1960’s

Economic Outlook

Snap Shot of Economic Activity

Investment15%

Government18%

Consumer69%

Consumption acts as the anchor for US economic activity.Consumption acts as the anchor for US economic activity.

Any retrenchment in consumer spending will lead to slower economy-wide growth rates

Consumer Worksheet

Pay Increase Averages 3.5%.Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%.Health Insurance Premiums Rise 7%-11%.

State and Local Property Taxes Rise.State and Local Property Taxes Rise. Reassessments based on high home appreciationReassessments based on high home appreciation

Energy Prices Take a Large Bite.Energy Prices Take a Large Bite. Even in context of recent improvement.Even in context of recent improvement.

Inflation Running near 3%Inflation Running near 3%

Interest Rates Rising in Context of Record Consumer DebtInterest Rates Rising in Context of Record Consumer Debt

Tapping Home Equity Not as Viable As In the PastTapping Home Equity Not as Viable As In the Past Slowdown in Job CreationSlowdown in Job Creation

Consumer Growth Rate Under PressureConsumer Growth Rate Under Pressure

Economic Outlook

No “Bleeding” from Housing

Housing Threat

Real threat to economic growth not Real threat to economic growth not the decline in housing…..the decline in housing…..

But…..But…..

The way we financed the past The way we financed the past boom…boom…

And…And…

Its impact on consumer Its impact on consumer spending…..spending…..

Potentially more profound in Potentially more profound in historyhistory

Growing Home Price & Income Gap

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1990 1992 1994 1996 1998 2000 2002 2004

Annual Growth Rate Comparison

Home Prices

Household Income

Emergence of Exotic Mortgages

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2003.4 2004.1 2004.2 2004.3 2004.4 2005.1 2005.2 2005.3

Interest Only Loan Share of Sub-Prime Market

Share by Principle Share by Principle Balance: Solid GreenBalance: Solid Green

Share by Loan Count: Share by Loan Count: Striped YellowStriped Yellow

Note: Sub-Prime accounts for 36% total mortgage market

Sub-Prime Mortgage Resets

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Total Loans Scheduled for Reset

Period of Emerging Period of Emerging TroubleTrouble

Economic Outlook : Real GDP Growth

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

----------2005---------- -------2006------- -------2007------

2005: 3.5%

Real GDP Annual Growth Rate

-------2008-------

2006: 3.1%

2007: 2.6%

2008: 2.4%

Risks On Downside: 2008

Construction & Cement OutlookOverview

Total Construction

Billion 1996 $

450

500

550

600

650

700

750

800

1990 1992 1994 1996 1998 2000 2002 2004 2006

2007: -1.8% decline projected …BUT.. based off record levels

Cement Intensities

Composition Of Cement Growth: Construction Activity Vs Cement Intensity Growth

0%

1%

2%

3%

4%

5%

6%

7%

8%

2003 2004 2005

Cement Intensity Growth

Cement Intensity Growth

Cement Intensity Growth

Construction Activity Growth

Construction Activity Growth

Annual Percent Change, Real Put-In-Place Construction & Cement Intensity

Concrete: Run-up in Competing Material Prices

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

6-Jan 6-Mar 6-May 6-Jul sept nov

Annual Percent Change, PPI, Bureau of Labor Statistics

Concrete

Asphalt

Steel

Concrete: Improving Competitive Position

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2005 5-May 5-Sep 2006 6-May sept 6-Feb 6-Jun oct

Change Relative Price Vs Concrete

Asphalt

Steel

Rapid Improvement in Concrete’s Relative Pricing Position

Residential Construction Single Family

Strength in Starts More Than Low Rates…

The Cyclical Upside: 2001 - 2005The Cyclical Upside: 2001 - 2005

Low mortgage rates key factor in single family starts over past few years.Low mortgage rates key factor in single family starts over past few years. Emergence of exotic mortgages also a key factor…particularly in strong home Emergence of exotic mortgages also a key factor…particularly in strong home

appreciation environment.appreciation environment.

Easy credit conditions contributed to strong home-buying environment.Easy credit conditions contributed to strong home-buying environment. Speculators add froth to market in light of strong appreciation rates.Speculators add froth to market in light of strong appreciation rates.

The Cyclical Downside: 2006 - 2009The Cyclical Downside: 2006 - 2009 Mortgage rates rising.Mortgage rates rising. Exotic mortgages losing favor.Exotic mortgages losing favor.

Defaults and delinquencies cause a deterioration in credit quality and a Defaults and delinquencies cause a deterioration in credit quality and a tightening of credit conditionstightening of credit conditions

Speculators reduced/disappear in lower appreciation rate environmentSpeculators reduced/disappear in lower appreciation rate environment

Affordability Index

Most Affordable

Pacific

MountainWest North Central East North

Central

SouthAtlantic

East South

Central

West South Central

NewEngland

Middle Atlantic

Affordability Ratio

2nd Tier 3rd Tier 4th Tier Least Affordable

Profile: Single Family Buyer

Primary91%

Investment2%

Vacation7%

2000 Estimated 2006

Primary81%

Investment12%

Vacation7%

Coastal and Resort Areas: Double the National Average For Speculators

Note: Speculators Are 1st to Leave the Market

Inventory Draw Required

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000 2001 2002 2003 2004 2005 2006

Homes on Market/Monthly Selling Rate

Ten Year Average

Inventory Build

Required

Inventory Draw

Required

Highest Level Highest Level Since 1997Since 1997

10 Years of Inventory Build Conditions Disappear

Estimating the Size of Overhang and Speed of Burn Off

What is the desired level of inventory?What is the desired level of inventory? Historical: 5 months….Overhang = 135K Historical: 5 months….Overhang = 135K Past cyclical low: 3.5 months….Overhang = 283KPast cyclical low: 3.5 months….Overhang = 283K PCAPCA 4 months assumption…Overhang = 233K 4 months assumption…Overhang = 233K

When is excess burned off?When is excess burned off? 5 months desired supply = February 20075 months desired supply = February 2007 4 months desired supply = July 2007 4 months desired supply = July 2007 (PCA)(PCA) 3.5 months desired supply = November 20073.5 months desired supply = November 2007

Slow gradual gains achieved after burn off.Slow gradual gains achieved after burn off.

SF Inventory Adjustment Outlook

-250

-200

-150

-100

-50

0

50

100

150

200

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

(000) Units

Note: 70K Overhang burned off since mid-2006

Nonresidential Construction

Overview

Nonresidential Outlook

20

40

60

80

100

120

140

160

180

200

Billion Dollars, Real 1996 $

Projected

Underlying nonresidential drivers Underlying nonresidential drivers improving. improving.

Despite large percentage gains for Despite large percentage gains for 2006, most markets weak from 2006, most markets weak from historical perspective.historical perspective.

Past cyclical peak not realized.Past cyclical peak not realized. Slower growth outlook depresses Slower growth outlook depresses

expected ROI and tempers expected ROI and tempers recovery.recovery.

High material costs reduce growth. High material costs reduce growth. Increasing cement intensities Increasing cement intensities

reinforce construction activity gains.reinforce construction activity gains.

Institutional nonresidential gaining Institutional nonresidential gaining momentum; less sensitive to slower momentum; less sensitive to slower growth environmentgrowth environment

Public Construction

Public Construction Outlook

-60

-40

-20

0

20

40

60

80

1979Q1 1991Q1 2003Q1

93% of public construction 93% of public construction performed at state/local level.performed at state/local level.

State/Local fiscal problems State/Local fiscal problems

fading.fading.

Revenue growth improves with Revenue growth improves with economy and job growth.economy and job growth.

Surpluses will re-emerge.Surpluses will re-emerge.

Pent-up demand released.Pent-up demand released. Highway Bill adds strength.Highway Bill adds strength. 2006: +4.8% 2007: +5.5%2006: +4.8% 2007: +5.5% Note: 2005: +1.9%Note: 2005: +1.9%

Billion $ State Surplus/Deficit, NIPA

MARI

NH

0-9% 20-29% 30-39%

Pacific

MountainWest North Central

East North Central

SouthAtlantic

East South

Central

District of Columbia

West South Central

NewEngland

Middle Atlantic

10-19%

Deficit as percentage of budget

$.85

$.11

$1.0

$.16$0

$.36

$.4 $.98

$0$1.5

$.05

$.38

$.3

$.12

$38

$3.7

$3.6

$.6

$.22

$.41

$1.0

$.09

$2.4$0

$2.0

$.75

$.5

$.49

$1.3

$1.7

$.2

$.2

$2.4

$9.3

$2.0

$.74

$4.6

$.14$.4

$.15$3.0$.17

$.85$.2

NJ$1.9CT

MDDE

VT

$.25$1.1

$2.0

$.03

$.08

Primary Source: Newsweek July 28, 2003

Secondary Sources:Nat’l Conf. of State Leg., Center on Budget and Policy Priorities, Nat’l Assn. of State Budget Officers, Calif. Budget Project

Dollar figures, in billions, indicate amount states had to save to balance 2004 budget.

KEY

Public Construction Outlook: State Deficit Estimates Fiscal Year 2004

MARI

NH

Public Construction Outlook: State Deficit Estimates Fiscal Year 2005

0-9% 20-29% 30-39%

Pacific

MountainWest North Central

East North Central

SouthAtlantic

East South

Central

District of Columbia

West South Central

NewEngland

Middle Atlantic

10-19%

Deficit as percentage of budget

$0

$0

$0

$0

$.3

$1.1

$.17

$15

$0

$2

$.5

$.34

$.71

$.19

$.0

$.6

$.62

$.17

$.9

$0

$5.1

$5

$.14

$0$1.5$.19

$.74

NJ$.2CT

MD$.93

$.8

Secondary Source: National Association of Budget Officers

Dollar figures, in billions, indicate amount states had to save to balance 2005 budget.

KEY

No availabledata

DE $0

$0

$.9

$0

$.6$.2

$.9

$0

$.21

$0

$0

$0

$.3

$0

$.5

$0

$0

VT $0

$.12

$0

Primary Source: Center on Budget Policy and Priorities Feb / 04

Market Conditions

No Shortage Tight Supplies

Cement Supply Survey Summer 2006

Spot Tight Supplies

$0

$10

$20

$30

$40

$50

$60

1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006

Import Volume & Freight Rates

Import Volume, Million Metric TonsFreight $ Per Ton, Handymax, Asia-Gulf

Imports 1st Half 2007: 42 MMT Rate

Imports 2006: 33.6 MMT

Net Increase (SAAR): 8.4 MMT

Consumption Growth Rate: 1 MMT

7 MMT (SAAR) Overhang

$0

$10

$20

$30

$40

$50

$60

1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006

Import Volume & Freight Rates

Import Volume, Million Metric TonsFreight $ Per Ton, Handymax, Asia-Gulf

2nd Half 2006: Import Rate Contracts

Some Re-Tightening of Market

Conclusions

Cement Outlook: 2007

World of Concrete

Las Vegas, Nevada

Edward J. Sullivan

Staff Vice President and PCA Chief Economist

For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve