Ed Sullivan, Chief Economist PCA Cement Outlook World Of Concrete January 2012 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Economic Outlook

Synchronized Recovery Theory Job creation determines how quickly the recovery cycle spins. Incremental Demand Gains Job Gains Sentiment Gains Lending Standards Ease & Hiring Accelerates Heals Structural Restraints In the context of moderating productivity Gains Leads to: Defaults & perceived lending risks decline Sentiment includes Consumer, Business & Banks:

False Hopes: Net Job Creation Annualized Net Job Creation 2.7 Million Annualized 3 month Moving Average

Employment Outlook Annual Change, Thousands Employed Potential Upside Risk Source: BLS Recession Recoveries: 3 Years Following, Annual Average 1991: 3.08 Million, 2001: 2.22 Million, Current: 1.35 Million

Housing Recovery

Ingredients for a Starts Recovery Homebuilders Expected ROI Inventory no higher than 5 months supply Price stability Weaker the price environment…lowers the months’ supply trigger point. Carry costs erode expected ROI.

Foreclosures Accelerate Foreclosure Impacts Add to Inventory Depressed HomebuilderROI Depress Prices 2.5-3.0 Million Foreclosures in 2009-2011 annually. Nearly 1 Million Bank possessions annually. Adds supply. Bank owned properties discounted. Pressures new home prices. Longer carry costs. Lower revenues. Erodes expected ROI. Delays recovery in starts.

Single Family Upside Risk? Single Family Starts Projections Comparison Thousand Starts 2011 2012 2013 PCA 421 443 567 Mortgage Bankers Association 420 474 619 NAHB 424 495 723 National Association of Realtors 416 480 ---- Other Associations’ Average 483 671 Tons Per Start 19.2 Upside Risk (000 Tons) --- 768 1,997 429

Nonresidential Drag

Nonresidential Construction Real 1996 PIP $ Upside: Public Utilities, Farm, Retail, Industrial -50% Source: Dept of Commerce, PCA

Office Buildings: Recovery Process New Office Hiring Vacancy Rates Decline Leasing Rates Stabilize Credit Troubles Ease Asset Prices Firm Leads to a recovery in office construction. 1/5 of all jobs in the office. Defaults & perceived lending risks decline After reaching threshold of roughly 14% vacancy rate

Office Employment Thousands Employed Vacancy Rate: 11.3% Vacancy Rate: 12.7% Vacancy Rate: 18.3% Source: BLS

Public Recovery

National Estimates: States Do Not Heal in a Synchronized Fashion State Deficits $ Real = National Estimates: States Do Not Heal in a Synchronized Fashion

Highway Bill Cement Consumption Projections Spring Versus Summer Assumptions Spring Forecast Fall Forecast

The Outlook

Portland Cement Consumption Thousand Metric Tons =

Portland Cement Capacity Utilization Production as Percent of Capacity =

Conclusions Strategy Options Market correction will be prolonged. Construction in a 12 year peak-to-peak recovery. Strategy Options Sit back and wait to ride the market? Recognize stars are aligned and proactively take market share.

Conclusions Recognize stars are aligned and proactively take market share. World Growth Dynamics, Oil Prices, Refining Practices, State Fiscal Distress, Focus on Efficiency in Government Spending, Demographics of Nearly 50 Million More Drivers

Carpe Diem

Carpe Diem Paving Strategy Options Market correction will be prolonged. Construction in a 12 year peak-to-peak recovery. Strategy Options Recognize stars are aligned and proactively take market share. Paving

Carpe Diem World Economic Growth Drivers have changed. Changes in World Growth Impact Construction Material Prices – To the Benefit of Concrete. Slower World Growth Works Against Concrete’s Competitiveness States Face Near & Long Term Fiscal Pressures. Near Term = Recession and Revenues Long Term = Entitlement Spending State DOTs are Distressed About Rising Maintenance Costs and Ability to Meet Looming Demographic Trends.

New Paving Realities

Oil Price History $ Per Barrel, West Texas Intermediate New Reality: Emphasis on LDC’s & Demand Side Old Reality: Emphasis on OPEC & Supply Side OPEC Induced Energy Crisis Asia (excluding Japan) = 20% world Oil Demand OPEC Formed Source: U.S. Energy Information Agency

Asphalt PPI Price History 1996 = 100 New Reality: Emphasis on LDC’s & Demand Side Old Reality: Emphasis on OPEC & Supply Side Asia (excluding Japan) = 20% world Oil Demand Source: Bureau of Labor Statistics, Producer Price Indices

Paving Material PPI Price Comparisons 1996 = 100 Asphalt PPI Old Reality: 1982-2004 Average Annual Concrete PPI Increase: +2.1% Average Annual Asphalt PPI Increase: +1.1% New Reality: 2005 – 2011 Average Annual Concrete PPI Increase: +4.0% Average Annual Asphalt PPI Increase: 12.0% Concrete PPI Source: Bureau of Labor Statistics, Producer Price Indices

New Reality: Emphasis on LDC’s & Cokers Initial Bid Concrete Vs Asphalt Paving Costs Dollars Per Two Lane Road Mile - Urban New Reality: Emphasis on LDC’s & Cokers Asphalt Concrete Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)

New Reality: Emphasis on LDC’s & Cokers Life Cycle Concrete Vs Asphalt Paving Costs Dollars Per Two Lane Road Mile - Urban New Reality: Emphasis on LDC’s & Cokers Asphalt Concrete Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)

State Fiscal Conditions & Demographics

Medicaid Pressures Build Billions of $ 34% Blue/Solid: Total Medicaid Spending Red/Striped: State Medicaid Spending 30% 21.5% of Total State Expenditures 25% 2032: State Medicaid Spending Exceeds One Trillion $

Will Medicaid “Crowd Out” Highway Spending? Billions of Real State Spending Targeting Transportation Transportation Spending: Constant 8% Share of Budget Transportation Spending: Share Reduced to 7% of Budget Transportation Spending: Share Reduced to 5% of Budget

Licensed Drivers On the Road Millions DOTs Must Expand Road Systems to Avoid Crippling Congestion Costs Source: FHWA & PCA Estimates

Maintenance Cost Per Thousand Vehicle Miles Travelled OPEC Formed New Paving Realities Source: FHWA

Maintenance Cost Per Vehicle Mile Travelled Are Highly Correlated to Oil Prices Maintenance $ Per 000 VMT $ Per Barrel, WTI Benign OPEC ERA Average Annual Increases MC Per VMT = 1.9% Oil = 0.0% OPEC ERA Average Annual Increases MC Per VMT = 6.5% Oil = 15.4% New Realities ERA Average Annual Increases MC Per VMT = 7.7% Oil = 10.6% Source: FHWA, EIA

Even Blind Squirrels Find Nuts - Eventually

DOT Policy Must Stress Efficiency In Spending An Economic Axiom: Free Markets best allocate resources by the unbiased picking of winners and losers. Must accept the new paving realities and not rely on old “truisms” that led efficient spending in the past. New cost competitive alternatives to asphalt. Accept alternative bid and equivalent design – open the market to free market competition. Must rid themselves of policies that distort the “true cost” of initial paving costs. Asphalt Escalator Clauses. Must employ the use of LCCA that recognize that there are different influencers at play for concrete and asphalt prices. Efficiency can be achieved by letting the “free market” work

Theory: Escalators Encourage Competition – To the Benefit of DOT

Contradictory DOT Policy? Most States have an Asphalt Escalator. Few States have a cement escalator. Survey of DOTs: Cement Prices are Stable and no need. Asphalt Prices are Volatile and rising – therefore a need. FWHA recommends use of LCCA. BUT…most states use the same discount rate (assumed material price increase) for asphalt as they do for concrete.

Potential State Savings Annual Initial Bid $ Savings Source: PCA Based on WISPAV Data, For Urban High Volume Roads Only

Ed Sullivan, Chief Economist PCA Cement Outlook World Of Concrete January 2012 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

Multifamily Starts