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Construction & Cement Outlook
ACI/APRMCA 2007 Joint AGM
February 16, 2007
St. John, NB
David E. Czechowski - Sr. Canadian Economist
Economic Research
Portland Cement Association
Key Points of Analysis
U.S. Economy
Canadian Economy
Canadian Cement
Demand
&
Supply
Atlantic Provinces
Demand
&
Supply
Key Near Term Issues
Oil PricesOil Prices
Is the recent rundown sustainable?Is the recent rundown sustainable?Where is International Demand/Disruptions/OPEC?Where is International Demand/Disruptions/OPEC?
Inflation Inflation Will it subside enough to satisfy the Fed?Will it subside enough to satisfy the Fed?
Interest RatesInterest RatesResumption in increases? Resumption in increases?
Housing DeclineHousing DeclineHard or Soft landing?Hard or Soft landing?
Job CreationJob Creation
(Change from prior month)
Nonfarm Employment
Job Growth
2005: +2.03 Million
2006: +1.91 Million
2007: +1.60 Million
-400
-200
0
200
400
600Thousands
00 01 02 03 04 05 06 07
Consumer Under Pressure
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 RiseState and Local Property Taxes Rise
Home appreciated reassessmentHome appreciated reassessment
Energy Prices Take a BiteEnergy Prices Take a Bite
Interest Rates Rising in Context of Record Interest Rates Rising in Context of Record DebtDebt
Tapping Home Equity Bank Not as AttractiveTapping Home Equity Bank Not as Attractive Slowdown in Job CreationSlowdown in Job Creation
Consumer Confidence FlatConsumer Confidence Flat
Real InvestmentNonresidential Structures & Equipment
-20
-10
0
10
20
30
40
Qtr/Qtr% Change
90 92 94 96 98 00 02 04 06
Investment Spending
Higher Expected ROI
Pent Up Demand
Corporate Profits = Internal Funds
Low Interest Rates = External Funds
Unfavorable Factors Favorable Factors
Strong, But Slower Investment Spending Growth
Construction Costs
Energy Prices
Real GDP Growth
--------2005---------- --------2006-------- --------2007-------
3.5%
Qtr-Qtr Annual Growth Rate
--------2008--------
3.1% 2.6% 2.4%
Risks On Downside
-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
Changing Composition of Construction Spending
Growth Leader: ResidentialGrowth Leader: Residential Low Interest RatesLow Interest Rates
PublicPublic State Tax Revenues Hurt by State Tax Revenues Hurt by
Anemic Economic GrowthAnemic Economic Growth
Growth Laggard: NonresidentialGrowth Laggard: Nonresidential Weak EconomyWeak Economy
Growth Leader : NonresidentialGrowth Leader : Nonresidential Steady EconomySteady Economy
PublicPublic State Tax Revenues Recovery State Tax Revenues Recovery
Due to Economic GrowthDue to Economic Growth
Growth Laggard : ResidentialGrowth Laggard : Residential Rising Interest RatesRising Interest Rates
2001-2005 2006-2010Low Interest Rates
Weak Economy
Rising Interest Rates
Steady Economy
Housing Activity More Than Low Rates…
The Cyclical Upside: 2001 - 2005The Cyclical Upside: 2001 - 2005
Low mortgage ratesLow mortgage rates Emergence of exotic mortgagesEmergence of exotic mortgages
Easy credit conditionsEasy credit conditions Speculators add froth to the marketSpeculators add froth to the market
The Cyclical Downside: 2006 - 2009The Cyclical Downside: 2006 - 2009 Mortgage rates will riseMortgage rates will rise
Inventory DrawInventory Draw Exotic mortgages losing favorExotic mortgages losing favor
Defaults/delinquencies deteriorate credit quality and tighten conditionsDefaults/delinquencies deteriorate credit quality and tighten conditions
Speculators reduced/disappear in lower appreciation rate environmentSpeculators reduced/disappear in lower appreciation rate environment
Sub-Prime Mortgage Resets
Total Loans Scheduled for Reset
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
Period of Emerging Period of Emerging TroubleTrouble
0.5
1.0
1.5
2.0
MillionUnits
98 99 00 01 02 03 04 05 06 07 08 09
Single Family Starts
Nonresidential Construction
Underlying nonresidential Underlying nonresidential drivers improving drivers improving
Despite gains for 2006, Despite gains for 2006, most markets weak from most markets weak from historical perspectivehistorical perspective
Slower growth outlook Slower growth outlook depresses expected ROI depresses expected ROI and tempers recoveryand tempers recovery
High material costs reduce High material costs reduce
growth growth
100
130
160
190
220
Billions1996$
95 97 99 01 03 05 06 07 08 09
Public Construction
93% of public 93% of public construction performed construction performed at state/local levelat state/local level
State/Local fiscal State/Local fiscal
problems fadingproblems fading
Revenue growth Revenue growth improves with economy improves with economy and job growthand job growth
Pent-up demand releasedPent-up demand released Highway Bill adds Highway Bill adds
strengthstrength -80
-40
0
40
80
$Billion
89 91 93 95 97 99 01 03 05 07
State & Local Government Surplus
Public Construction
120
140
160
180
200
220
Billions1996$
93 95 97 99 01 03 05 07 09
U.S. Construction Outlook
500
600
700
800
900
Billions1996$
93 95 97 99 01 03 05 06 07 08 09
Conclusions
Residential Easement ModestResidential Easement Modest Mortgage Rate Increases SubduedMortgage Rate Increases Subdued Affordability ImprovesAffordability Improves
Nonresidential RecoveryNonresidential Recovery Turning Points Already AchievedTurning Points Already Achieved Still Weak from a Historical PerspectiveStill Weak from a Historical Perspective Recovery within Sectors Differ Recovery within Sectors Differ
Retail/Hotel/Industrial LeadRetail/Hotel/Industrial Lead Institutional/Office LagInstitutional/Office Lag
Public Waiting In WingsPublic Waiting In Wings State Fiscal RecoveryState Fiscal Recovery Pent-up DemandPent-up Demand SAFETEASAFETEA
U.S. Cement Outlook
Portland Cement Consumption
-20
-10
0
10
20
30
Year-Year
% Change
02 03 04 05 06 07
Harsh Winter
Mild Winter
Mild Winter
YTD 0.9%
No Shortage Tight Supplies
Cement Supply Survey Summer 2006
Spot Tight Supplies
Cement Intensity
Favorable Relative Price ConditionsFavorable Relative Price Conditions Concrete prices relative to steel/asphalt Concrete prices relative to steel/asphalt Material substitution in designMaterial substitution in design
Cyclical RecoveryCyclical Recovery Larger, more cement intensive projects Larger, more cement intensive projects
typically associated with economic recoverytypically associated with economic recovery
Construction MixConstruction Mix Outlook favors nonresidential and public Outlook favors nonresidential and public
construction with typically higher cement construction with typically higher cement intensityintensity
Code Changes/Green BuildingCode Changes/Green Building Fiscal HealingFiscal Healing
Portland Cement Consumption
60
70
80
90
100
110
120
130
140
MillionMetric Tons
89 91 93 95 97 99 01 03 05 07 09
Year
2004 6.8%
2005 5.6%
2006 0.6%
2007 0.3%
2008 2.9%
2009 3.6%
Import Mix Shift
5.3%Mexico
20.9%Latin America
19.7%Europe
21.1%Canada
29.5%Asia
2004
3.6%Other
6.5%
17.4%
18.5%
16.0%
36.0%
2005
5.5%
6.3%
11.1%
13.0%
13.1%
55.3%
2006
1.2%
Announced Capacity Increases(Million Metric Tons)
-1
0
1
2
3
4
5
6
7
8
96 98 00 02 04 05 06 07 08 09 10
Net Expansion 2006-2010
22.5 MMT
$5.0 Billion
Looking Forward
Tight market conditions dramatically reducedTight market conditions dramatically reduced
Characterized by high operating ratesCharacterized by high operating rates
Continued growth in Blended CementsContinued growth in Blended Cements
Inventories lean and well managedInventories lean and well managed
Major expansion does not materialize until 2008Major expansion does not materialize until 2008
U.S. Summary
Slowing Economic GrowthSlowing Economic Growth Rising Inflation, Interest Rates, Energy Prices, Slower Job CreationRising Inflation, Interest Rates, Energy Prices, Slower Job Creation
Construction Market FlatteningConstruction Market Flattening Residential Weak Residential Weak Slower Nonresidential & Public RecoveriesSlower Nonresidential & Public Recoveries Higher Material CostsHigher Material Costs Potential for Market Contraction in 2007Potential for Market Contraction in 2007
Cement SupplyCement Supply
Tight Market Conditions Dramatically ReducedTight Market Conditions Dramatically Reduced
Add Extra Dose of ConservatismAdd Extra Dose of Conservatism Prepare Contingency Plans Incorporating Downside RisksPrepare Contingency Plans Incorporating Downside Risks
Canadian Markets
Canadian Outlook
Overall Performance Indicators Remain SolidOverall Performance Indicators Remain Solid Employment/Income Growth Supporting Domestic DemandEmployment/Income Growth Supporting Domestic Demand The C$ will remain elevated The C$ will remain elevated
- Hampering tradeHampering tradeButBut+ Keeping Inflation in checkKeeping Inflation in check+ Keeping interest rate increases mutedKeeping interest rate increases muted
Residential Construction MarketsResidential Construction Markets Central provinces already weakCentral provinces already weak Western provinces offer balance but also showing fatigueWestern provinces offer balance but also showing fatigue
Nonresidential Construction EmergingNonresidential Construction Emerging Vacancy rates decliningVacancy rates declining Central provinces retooling to remain competitiveCentral provinces retooling to remain competitive
Engineering ConstructionEngineering Construction Profits and revenue provide a means for investmentProfits and revenue provide a means for investment
Oil Price Assumptions
Strong International DemandStrong International Demand Japan/China/IndiaJapan/China/India
Supply/Production DisruptionsSupply/Production Disruptions Middle East, Nigeria, VenezuelaMiddle East, Nigeria, Venezuela OPECOPEC
2006: $65.83 2006: $65.83 (WTI - $/BBL)(WTI - $/BBL)
2007: $60.302007: $60.30 2008: $58.862008: $58.86
Employment Growth
-40
0
40
80
120Thousands
03 04 05 06 07
Employment Growth
-40
0
40
80
120Thousands
03 04 05 06 07
Manufacturing
Services
Economic ProfileCanada
Dollar
Employment
Mortgage Rates
2007
1.6%
2006 20092008
1.4% 1.6%2.0%
.862.876 .848.882
7.1%6.9% 7.2%6.7%
Housing Starts 204212 205227
ConstructionSpending
0.5%-0.2% 1.9%0.9%
Canadian GDP
0
2
4
6
8
Year-Year% Change
98 99 00 01 02 03 04 05 06 07 08 09
Canadian Construction
Residential ActivityCanada
060504
12
11
10
9
8
Residential Activity - MultiplesAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
060504
12
11
10
9
8
Residential Activity - SinglesAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
060504
24
22
20
18
16
Residential Activity - TotalAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
Housing Starts
140
170
200
230
260
ThousandUnits
99 00 01 02 03 04 05 06 07 08 09
Nonresidential ActivityCanada
060504
800
600
400
200
Institutional & Governmental ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
060504
1400
1200
1000
800
600
Commercial ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
060504
500
400
300
200
Industrial ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
Construction Spending
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Index1999=1.0
99 00 01 02 03 04 05 06 07 08 09
Residential
Nonresidential
Engineering
Canadian CementIndustry
Industry Profile
Consumption: 9 mmtConsumption: 9 mmt
Clinker Capacity: 16.2 mmt (+1.2%)Clinker Capacity: 16.2 mmt (+1.2%)16 Plants/8 Companies16 Plants/8 Companies
Production concentrated in Ontario/QuebecProduction concentrated in Ontario/QuebecAverage Kiln Capacity up 33% in last ten yearsAverage Kiln Capacity up 33% in last ten years
Grinding Capacity: 17.5 mmt (-2.6%)Grinding Capacity: 17.5 mmt (-2.6%)
Imports - ClinkerImports - Clinker50-90,000 Over last three years50-90,000 Over last three yearsMostly Turkish into QuebecMostly Turkish into Quebec
Imports - CementImports - Cement650,000/Year Average (9% of Consumption)650,000/Year Average (9% of Consumption)90% from the U.S. mostly into Ontario/Alberta/BC90% from the U.S. mostly into Ontario/Alberta/BC
Portland Consumption
-10
0
10
20
30
40
Year-Year% Change
03 04 05 06 075.1% 5.0% 1.2% 1.7%
7
8
9
10
11
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Portland Consumption
MillionMetric Tonnes
5.1%5.0%
1.2%
Cement & Clinker Exports
2
4
6
8
MillionMetric Tonnes
82 85 88 91 94 97 00 03 05
99% to the U.S.99% to the U.S.OthersOthers
Middle EastMiddle East AsiaAsia EuropeEurope South AmericaSouth America
06
Cement Capacity Utilization
75
80
85
90
95Percent
95 96 97 98 99 00 01 02 03 04 05
SCM’s
0.90
1.00
1.10
1.20
1.30
1.40
MillionMetric Tonnes
00 01 02 03 04 05 06
Cement Intensity
Competitive price Competitive price position vs. other position vs. other building materialsbuilding materials
Composition of Composition of constructionconstruction
Green environment Green environment Product Product 50
55
60
65
Tonnes/Million 2005$
99 00 01 02 03 04 05 06 07 08 09
Competitive Materials
0706050403
2.00
1.75
1.50
1.25
1.00
0.75
Competitive Materials Cost Indices - Canada(January 2003=1.0)
Source: Statistics Canada
Steel
Lumber
Concrete
Asphalt Bitumen*
Atlantic Region
Employment Growth Atlantics
-10
-5
0
5
10
15
20Thousands
04 05 06 072.0% 0.2% 0.5%
Employment GrowthAtlantics
1.3%1.3%Services
10.4%0.1%Construction
3.4%2.3%Manufacturing
20042003
1.2%
0.1%
- 8.2%
2005
1.1%
5.5%
- 1.5%
2006
2.0%1.4%Total 0.2% 0.5%
Net MigrationAtlantics
-50
-25
0
25Thousands
99 00 01 02 03 04 05 06 07 08 09
Population GrowthAtlantics
-0.6
-0.3
0.0
0.3
0.6
Year-Year% Change
91 93 95 97 99 01 03 05 07 09
Real Economic Growth Atlantics
0
2
4
6
8
Year-Year% Change
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Housing StartsAtlantics
3 Month Moving Average
7
10
13
16
ThousandUnits
00 01 02 03 04 05 06 07
Residential PermitsAtlantics
060504
1.4
1.2
1.0
0.8
Residential Activity - TotalAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
060504
0.8
0.6
0.4
0.2
0.0
Residential Activity - MultiplesAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
060504
0.9
0.8
0.7
0.6
0.5
Residential Activity - SinglesAll Areas - Seasonally Adjusted - Units (000)
3MMA 12MMA
Housing StartsAtlantics
8
10
12
14
ThousandUnits
99 00 01 02 03 04 05 06 07 08 09
Nonresidential PermitsAtlantics
060504
100
80
60
40
20
Commercial ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
060504
50
40
30
20
10
0
Industrial ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
060504
40
30
20
10
0
Institutional & Governmental ActivityAll Areas - Seasonally Adjusted - $ Million
3MMA 12MMA
Construction SpendingAtlantics
20062005 2007 2008
-0.2%6.2%Total -0.6% 0.4%
-4.8%3.4%Residential -5.3% - 2.9%
0.5% 12.1%Nonresidential 1.0% 1.5%
5.9%7.1%Engineering 3.1% 3.1%
Atlantic Region Cement
Market ProfileAtlantics
Consumption: .577 mmt (2006)Consumption: .577 mmt (2006)
Clinker Capacity: .520 mmt (2004)Clinker Capacity: .520 mmt (2004) 1 Plant (Brookfield)1 Plant (Brookfield)
Grinding Capacity: .616 mmt (2004)Grinding Capacity: .616 mmt (2004)
Cement Imports (2003-2005)Cement Imports (2003-2005) 12 - 24,000 t/Y (200612 - 24,000 t/Y (2006EE = 10,000) = 10,000) Mostly from U.S. into N.B.Mostly from U.S. into N.B.
Cement Exports (2003-2005 Average)Cement Exports (2003-2005 Average) 9 - 50,000 t/Y (20069 - 50,000 t/Y (2006EE = 25,000) = 25,000) From N.S. to Denmark/VenezuelaFrom N.S. to Denmark/Venezuela
Key Markets ExposureAtlantics
Cement Consumption as % of Total Provincial Cement Consumption
Residential: 29% Residential: 29% 33%33%
Nonresidential: 28% Nonresidential: 28% 30%30% Industrial: 7% Industrial: 7% 8% 8% Commercial: 14% Commercial: 14% 16%16% Institutional: 7% Institutional: 7% 6% 6%
Engineering: 37%Engineering: 37% 33%33% Transportation: 19%Transportation: 19% 21%21% Other: 17%Other: 17% 12%12%
National
Portland Cement ConsumptionAtlantics
-40
0
40
80
Year-Year% Change
03 04 05 06 0710.3% -4.6% 0.3% 6.5%
Concrete Products Markets Atlantics
24,56525,872Precast
17,98217,381Concrete Pipe
8,19812,441Brick & Block
20042003
29,346
20,681
7,573
2005Tonnes
21,976
26,075
7,925
2006
Source: PCA Market Research – Consumption by User Group
ImportsAtlantics
12,8788,358Portland
3041,283White
00Clinker
20042003
21,874
642
0
2005Tonnes
Other* 2,5592,667 37,172
15,74112,308 59,688
7,903
303
0
2006YTD
2,044
10,250
Residential Cement Atlantics
50
100
150
200
250
ThousandTonnes
99 00 01 02 03 04 05 06 07 08 09
Nonresidential Cement Atlantics
100
150
200
250
ThousandTonnes
99 00 01 02 03 04 05 06 07 08 09
Engineering Cement Atlantics
140
180
220
260
300
ThousandTonnes
99 00 01 02 03 04 05 06 07 08 09
Portland Cement ConsumptionAtlantics
0.300
0.400
0.500
0.600
0.700
0.800
MillionMetric Tonnes
99 00 01 02 03 04 05 06 07 08 0910.3% -4.6% 0.3%
Provincial OutlookAtlantics
ResidentialResidential Out-migration/interest rates dampen activityOut-migration/interest rates dampen activity
NonresidentialNonresidential Small dollars chasing growthSmall dollars chasing growth Health/Education sectors carry upside potentialHealth/Education sectors carry upside potential
Engineering contributes moderatelyEngineering contributes moderately Fiscal balance sheet softerFiscal balance sheet softer
Mega-projects on the wind downMega-projects on the wind down Dollar pressing tourismDollar pressing tourism
Tar Ponds project begins to unfoldTar Ponds project begins to unfold
Construction & Cement Outlook
ACI/APRMCA 2007 Joint AGM
February 16, 2007
St. John, NB
David E. Czechowski - Sr. Canadian Economist
Economic Research
Portland Cement Association