1. 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

2. Economic Outlook

3. 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:

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

5. 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

6. Housing Recovery

7. 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.

8. Foreclosures Accelerate
Foreclosure Impacts
Add to Inventory
Depressed HomebuilderROI
Depress Prices
Million
Foreclosures in 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.

9. 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

10. Nonresidential Drag

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

12. 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

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

14. Public Recovery

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

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

17. The Outlook

18. Portland Cement Consumption Thousand Metric Tons=

19. Portland Cement Capacity Utilization Production as Percent of Capacity=

20. 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.

21. 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

22. Carpe Diem

23. 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

24. 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.

25. New Paving Realities

26. 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

27. 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

28. Paving Material PPI Price Comparisons 1996 = 100
Asphalt PPI
Old Reality:
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

29. 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)

30. 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)

31. State Fiscal Conditions & Demographics

32. 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 $

33. 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

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

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

36. 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

37. Even Blind Squirrels Find Nuts - Eventually

38. 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

39. Theory: Escalators Encourage Competition – To the Benefit of DOT

41. 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.

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

43. 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

44. Multifamily Starts