1. Ed Sullivan, Chief Economist PCA
Cement Outlook:
PCA Fall Board Meeting
October 2009
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

2. Introduction
Overview

3. Introduction: Overview
Economic fundamentals are improving.
Conditions remain weak.
Recovery will be gradual
Strong-Moderate Growth still a year away.
Private Sector no longer drives demand
Residential & Nonresidential recoveries are not expected to materialize anytime soon.
Recoveries: Residential 2011, Nonresidential 2012
Outlook shaped by policy actions.
State fiscal conditions sterilize ARRA impacts
ARRA reveals bureaucratic delays
Tilts impact even more so to

4. Portland Cement Consumption Thousand Metric Tons
Growth Rates
2007: - 9.6
2008:
2009:
2010:
2011:
2012:
2013:
2014:
- 54 MMT =

5. Capacity Expansion: Delays
Thousand Metric Tons
Stated Capacity Expansions: Fall 2009
Stated Capacity Expansions: Fall 2008

6. Introduction: Conclusions
Stimulus will provide some relief beginning in 2010….
…but hardship facing the industry will not be avoided…
Utilization rates do not top 80% until 2012.

7. Fall Forecast Adjustments
Downward Adjustments, Upside Risks

8. Bottom Line: Forecast Assessments
Macroeconomic forecast has performed extremely well.
Construction forecast has performed very well.
Cement forecast has consistently under estimated depth of decline.
How can this be?
Intensity declines
PCA forecasted worst decline in intensity in history.
Double the decline experienced during incorporated into forecast.
It should have been triple the decline.

9. Peak-to-Trough Decline in Intensity:
U.S. Cement Intensities (MT / Million Real 1996$ Construction Spending PIP)
Peak-to-Trough Decline in Intensity:
: -13.1
: -1.8
: -1.7
Summer Forecast: -26.1
Fall Forecast: -34.7

10. Bottom Line: 2009 Forecast Adjustments
Summer Forecast
Fall Forecast
Weak Economy
Real GDP = -3%
Job Loss = 4.5 million
Construction Spending
- 15.5%
ARRA delayed but some impact in 3rd/4th quarters.
Large declines in nonresidential
- 14.5%
Residential bottoms
Cement Intensity
- 6.9%
Cement Consumption: -22.0%
Weak Economy
Real GDP = -2.7%
Job Loss = 4.6 million
Construction Spending
- 16.5%
ARRA delayed and little impact in 3rd/4th quarters.
Larger declines in nonresidential
- 18.5%
Residential bottoms
Cement Intensity
- 11.6%
Cement Consumption: -26.6

11. Bottom Line: 2010 Forecast Adjustments
Summer Forecast
Fall Forecast
Tepid Economic Recovery
Real GDP = +1.3%
Job Creation = 648K
Construction Spending
+ 0.1%
ARRA impacts materialize.
State and Local offsets bottomed
Large declines in nonresidential
- 22.5%
Residential marginal recovery
Cement Intensity Recovers
+ 10.6%
Cement Consumption: +10.9%
Tepid Economic Recovery
Real GDP = +2.1%
Job Creation = 543K
Construction Spending
- 2.9%
ARRA impacts materialize.
Further State & Local offsets
Large declines in nonresidential
- 22.4%
Residential marginal recovery
Cement Intensity Recovers
+ 8.3%
Cement Consumption: +5.0%

12. Bottom Line: Forecast Risks
Unlike each of the forecasts of the past four years, the forecast contains upside risks.
ARRA funding is in place. Timing of its release is issue.
Attitude of “I haven’t seen it yet” leads to incorrect conclusion “It won’t have any impact in ”
Low cement intensities associated with high resurfacing share of ARRA spending are assumed.
Discretionary state spending will not sterilize ARRA impacts completely.
Discretionary highway spending has accounted for roughly MMT decline in cement volume since 2007.
Has potential sterilization impact run its course?
Intensity will rebound adding to cement volume.
Timing issue for out years of the forecast.
Existence of Pent-up demand?

13. The recession is over…BUT…not for you
Economic Outlook
The recession is over…BUT…not for you

14. Economic Adversity Abates Mid-2010
2006
2007
2008
2009
2010
Sub-Prime
Energy
Financial
Crisis
Labor Markets
State Deficits

15. Critical Conditions Required for Sustained Strong Economic Growth
Labor market recovery, ease in lending standards

16. The turning point for private construction activity is largely determined by the timing and magnitude of
Job growth.
Labor markets are improving at a gradual pace.
Roughly in-line with PCA expectations.
Job growth returns by end of 2nd quarter 2010.
After a short Saddle point .
Job creation approaches 3 million in 2011 and 2012.
Employment remains below pre-recession levels at end of 2012.
Work hours and temp hiring precedes job growth.
No evidence of this materializing.
Job outlook may be ambitious.

17. Job Recovery: Past Recessions - Change, Thousands of Jobs
Current Recession

18. Ease in lending standards.
The turning point for private construction activity will also be determined by the timing and magnitude of an
Ease in lending standards.
No easing until it is clear risks in lending have diminished.
THIS IS NOT A CAPITAL ISSUE, IT’S A CREDIT AND RISK ISSUE
Job creation, real estate prices must stabilize before risks ease.
Near term foreclosure rates accelerate.
Credit easing will not be synchronized across all sectors.
Residential lending risks decline first.
Easing 6 months after job creation begins.
Pattern of rising home prices sustained by mid-2010.
Nonresidential lending risks decline second.
Nonresidential write-offs accelerate through 2011.
Longer time lags for recovery in nonresidential fundamentals.
Nonresidential price conditions weaker.

19. Foreclosures have increased 110% over year ago levels.
Bank Charge-Offs versus Unemployment Rate - % Loans Charged-Off, % Unemployed
10.4%
March 2010
Foreclosures have increased 110% over year ago levels.

20. Repeat Sales Indices, 2000Q4 = 100 Commercial Real Estate Prices
Real Estate Price Progression
Repeat Sales Indices, 2000Q4 = 100
Home
Prices
Commercial Real Estate Prices

21. The recession is over…BUT…not for you
Economic Outlook
The recession is over…BUT…not for you

22. Economic Outlook: Consumers
Sustainable, strong consumer spending growth will not materialize until labor markets recover.
Job losses and high unemployment rates depress income growth.
Consumer sentiment is improving from record low levels.
Consumer is now saving.
Economic and psychological reasons.
Paradox of Thrift

23. Economic Outlook: Investment
Declines in Residential softening
Becomes a neutral contributor to growth near term
Low expected ROI hinders recovery in business investment.
Access to credit remains an issue.
Business Investment likely to be a significant drag on economic growth for another year.
Inventories will add strength….but probably less than many think

24. Inventory-to-Sales Ratio - Total
Betting on Inventory Accumulation to Spur Near Term Growth May Be Premature.

25. Economic Outlook: Government
ARRA spending has been slow to materialize.
Large state and local deficits partially sterilize the ARRA impacts.

26. Economic Growth Outlook
Percent Change, GDP Growth Rate

27. “the recession is officially over”.
The fundamentals of construction activity do not begin to materialize until well after it has been declared
“the recession is officially over”.
Real GDP growth is at hand….marking the “end of the recession”.
Inventory adjustments.
Job growth must be sustained and robust for a nonresidential recovery.
Turning point in vacancy rates, leasing rates and expected ROI.
Job growth must be sustained and robust for a residential recovery.
Forget hype over meager gains in sales pace, inventory improvement.
Significant gains in cement consumption will not materialize until 2011.
Private sector 2010 improvement in residential cement consumption offset by declines in nonresidential sector.
Wait until 2012 before ALL fundamentals in construction are positive.
Residential, nonresidential and public.
UPSIDE RISK –

28. Residential Outlook
Take-off Delayed

29. Residential Factors Sales Pace Inventory Adjustment
Labor market slow to recapture jobs.
Ease in lending standards slow to materialize.
Bank owned properties compete with new homes.
First time home buyer credits expire.
Inventory Adjustment
Foreclosures moratorium over.
Labor market stress and resets suggest increase in foreclosure rate
Shadow inventories.
Trigger Point Lower.
Home prices & economic distress suggest potential of lower builder trigger point for months supply.

30. Residential Cement Consumption Thousand Metric Tons
MMT =
55% of Total Cement Consumption decline is attributed to residential

31. Nonresidential Outlook
Dramatic Declines Ahead, Recovery Begins in late-2011

32. Nonresidential Credit Crisis
Revenues down due to rising vacancies and pressure on leasing rates.
Defaults increase
More than 60% 5 year balloon mortgages.
Many loans undertaken during peak years –
Loans come due in 2010.
More than 20% of financing via MBS.
This financial instrument has disappeared.

33. Nonresidential Cement Consumption Thousand Metric Tons
- 9.8 MMT =
18% of Total Cement Consumption decline is attributed to nonresidential

34. Fiscal Conditions Worsen, ARRA Impact Delayed
Public Outlook
Fiscal Conditions Worsen, ARRA Impact Delayed

35. State & Local Public Outlook
Fiscal conditions will partially sterilize ARRA

36. FY2009 State Deficits Deficit % Share of Budget No Deficit 0-10%ME RI MA VT NH AL GA SC TN FL MS LA TX OK NM KS MN IA MO AR WY CO ND SD NE WA ID MT OR NV UT AZ CA WI IL IN MI OH KY WV VA NC MD DE PA NY CT NJ HI
No Deficit
0-10%
11%-20%
21% +
Source: PCA, Center on Budget and Policy Priorities, June 2009

37. FY2010 State Deficits Deficit % Share of Budget No Deficit 0-10%ME RI MA VT NH AL GA SC TN FL MS LA TX OK NM KS MN IA MO AR WY CO ND SD NE WA ID MT OR NV UT AZ CA WI IL IN MI OH KY WV VA NC MD DE PA NY CT NJ HI
No Deficit
0-10%
11%-20%
21% +
Source: PCA, Center on Budget and Policy Priorities, June 2009

38. Job Losses Generate Deficits –Pushing Discretionary Spending Down
Discretionary State & Local Highway/Street Spending - Millions of Real $ (estimated)
Job Losses Generate Deficits –Pushing Discretionary Spending Down
State Discretionary Highway Spending Will Act as a Powerful Drag on Total Highway Construction Activity in

39. “Shovel Ready” Timeline
Jan
Feb
March
April
May
June
July
August
House Bill
Obama Inaugurated
Senate Passes & Bill Signed
Federal Paperwork
State Paperwork
Three Month Delay
Bid Letting
Bid Review
Contractor Paperwork
Construction Begins

40. ARRA – Weekly Highway Construction Spending - Dollars (Trend – No Seasonal Consideration)
History
Forecast

41. ARRA – Weekly Highway Construction Spending - Dollars (Trend – No Seasonal Consideration)
History
Forecast

42. New Highway Bill Assumptions
Upside Risks

43. SAFETEA-LU versus New Highway Bill Assumptions

44. Highway & Street Projections

45. Net Change in Highway Cement
Tracing the Impacts on Highway Cement Consumption Annual Change, Million Metric Tons
Discretionary State Spending
Federal Highway Program
Stimulus
Competitive Paving Gains
Net Change in Highway Cement
Total highway Cement

46. Public Cement Consumption Thousand Metric Tons
MMT =
26% of Total Cement Consumption decline is attributed to public decline

47. Intensity Projections
Upside Risks

48. U.S. Cement Intensities (MT / Million Real 1996$ Construction Spending PIP)
Intensity Outlook
2007: 155 / -6.7
2008: 143 / -12.5
2009: 126 / -16.6
2010: 137 / +10.5
2011: 139 / +2.0
2012: 143 / +4.7
2013: 144 / +0.6
2014: 148 / +3.4
Upside Risk to Intensity Projections:
New Highway Bill
Timing of Nonresidential Intensities

49. After the Economic Crisis
Medium Term Outlook

50. Portland Cement Consumption Thousand Metric Tons
- 54 MMT =

51. Ed Sullivan, Chief Economist PCA
Cement Outlook:
PCA Fall Board Meeting
October 2009
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009