United States Cement Outlook

1
United States Cement Outlook

• PCA Joint Meeting
• September 27, 2005
• Chicago, Illinois
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist

2
Key Points of Analysis
Baseline Projections
Supply Regional Demand National Impacts
Hurricane Impacts
Demand Operating Conditions
Revised Outlook
3
Bottom Line
4
Cement Outlook Hurricane Adjustments
YTD 5.0
5
Cement Outlook Hurricane Adjustments
6
Cement Outlook Hurricane Adjustments
7
Cement Outlook Hurricane Adjustments
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State of the Economy Pre-Hurricanes
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Pre-Hurricane Economic Growth Conclusions

• Foundations for Growth Firm
• Sustained job growth.
• Moderate growth, below 2004 level of 4.4 RGDP
• Growth Rate Slows 2005-2006
• Consumer and Investment sector slowdown.
• Less stimulative Fiscal policy.
• Tightening of Monetary Policy.
• Net Exports sustained drag.
• Threats to Scenario are Distant
• Twin Deficits

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Consumer Spending Outlook
Favorable Factors
Unfavorable Factors
Job Creation Affordability Consumer Spending
Confidence
No Tax Stimulus Less Home Refinancing
Activity High Oil Prices Rising Interest
Rates Growth in Mortgage ARMs Slower
Automotive Spending
Strong, But Slower Consumer Spending Growth
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Investment Spending Outlook
Favorable Factors
Unfavorable Factors
Higher Expected ROI Lower Cyclical Risk Pent Up
Demand Release Higher Profits Internal
Funds Low Interest Rates External Funds Lower
Risk Premiums
Tax Stimulus Expired 2004
Strong But Slower Investment Spending Growth
12
Federal Funds Rate Outlook
Federal Funds, Yellow Line
(Restrictive Stance)
(Accommodative Stance)
Fed Gradualism 6 Hikes 25 BP Each
2005 Six 25 BP Increases
13
Federal Deficit Percent of Total GDP
Percent, Federal Deficit/GDP
Balanced Budget
2004 Deficit 400.7 Billion
Deficit Projections 2005 -350 Billion, 2006
-280 Billion, 2007 -250 Billion, 2008 -225
Billion
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Economic Outlook Real GDP Growth
Real GDP Annual Growth Rate
2004 4.4
2006 3.3
2003 3.1
2005 3.5
----------2003----------
-------2004-------
-------2005------
-------2006-------
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Assessing Economic Risks More Rapid Assent in
Interest Rates Threaten Bubble Markets

• Rapid Home Appreciation Rates
• Bi-Coastal
• Bubble Burst Avoidance Scenario
• Gradual increase in interest rates.
• Incomes catch-up
• Restore historical patterns of affordability.
• Downstream Issues Avoided
• Structural imbalances created by blurring of home
  as an ATM
• Consumer record debt
• Consumption, job growth, nonresidential and
  public sectors adversely affected.
• Source of imbalancelong correction period
• Conclusion Gradual, modest declines in single
  family construction
• Downstream issues contained

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Pre-Hurricane Economic Growth Conclusions

• Foundations for Growth Firm
• Sustained job growth.
• Moderate growth, below 2004 level of 4.4 RGDP
• Growth Rate Slows 2005-2006
• Consumer and Investment sector slowdown.
• Less stimulative Fiscal policy.
• Tightening of Monetary Policy.
• Net Exports sustained drag.
• Threats to Scenario are Distant
• Twin Deficits

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State of the Industry Pre-Hurricanes
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Pre-Hurricane Demand Conclusions

• Residential Easement Modest
• Mortgage Rate Increases Subdued
• 6.5 Threshold Does Not Materialize Until 2006.
• Lean Inventory Position
• Cement Intensity Gains
• Nonresidential Recovery
• Key Sectors Have Already Turned
• Robust Percentage Gains
• Amplified by Intensity Gains
• Public Boom Waiting In Wings
• State Fiscal Recovery
• Pent-up Demand
• TEA-21

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Pre-Katrina Cement Supply Survey
No Shortage
Tight Supplies
Spot Tight Supplies
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United States Cement Domestic Production Outlook
(Thousand Metric Tons)
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Inventory Days Supply
Inventory/Daily Selling Rate
Average 19
22
United States Cement Import Outlook
(Thousand Metric Tons)
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Pre-Hurricane Supply Conclusions

• Domestic Supply Increases Face Limited Growth
• Characterized by high operating rates
• Persistently lean inventory position
• Murphys Law in Play
• Major expansion does not materialize until 2008.
• Supplying Market Growth Dependent On Imports
• Source Availability
• Ship Availability
• Freight Rates
• Weak
• Congested Ports
• Supply Constrained Market Until 2008
• Implies downside risks to consumption projections
• No Near Term Relief from 2004 Conditions

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Cement Outlook Hurricane Adjustments
YTD 5.0
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Hurricane Impacts Assessing the Damage
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Most Damaging Hurricanes 1972-2005
Current Tri-State 25 Billion in Damages,
Louisiana 100 Billion
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Katrina Damage Type
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Cement Consumption Type of Damage
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Katrina Impacts Supply Impacts
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Katrina Lost Clinker Production
Impact Share Total Regional Production
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Katrina Damage to Import Terminals
Biased
Impact on Supply Reduced Via Diversion. Minimal
Impact on Supply
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Port of New Orleans Importance
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Cement Supply River Traffic Disruption
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Cement Supply Rail Traffic Disruption
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Total Supply Disruptions
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Cement Supply Disruptions Pre-Existing
Market Conditions
No Shortage
Tight Supplies
Spot Tight Supplies
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Supply Disruption Conclusions

• Supply disruptions are significant
• Based on PCA assumptions 700,000
• Disruptions likely to be felt most in
  southern/mid portions of Mississippi River Valley
• Disruptions likely to impact 25 of states
  already experiencing shortage conditions.
• Supply disruptions NOT due to damages to cement
  facilities.
• Very little supply impact can be attributed to
  physical damage to industrys production or
  import operations.
• Source of disruption Logistical Infrastructure
• Extent of disruption dependent on infrastructure
  repair time.
• River Rail
• Industrys efforts to solve logistical issues
  are limited

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Katrina Impacts Demand Impacts
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(No Transcript)
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Clean-up Recovery Periods
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Demand Impacts Tri-State Region
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Katrina Assessments Mississippi, Florida, Alabama

• Traditional Recovery Process Expected in Florida,
  Mississippi Alabama
• Wind Damage.
• Relatively low cement intensities.
• Relatively short clean-up and recovery (Begins
  Nov-Jan).
• Typically northern building season ends in
  October.

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Florida Impacts
Freed Supply in Hurricane Affected Areas assumed
to be diverted to other unaffected areas in tight
supply. State does not suffer depressed
consumption period. Temporary geographic shift
in demand. Net state gain 45,000
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Alabama Impacts
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Mississippi Impacts
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Demand Impacts New Orleans
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New Orleans Residential Cement Requirements
Based on Red Cross Estimates of 200,000 Homes
Destroyed
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Nonresidential Requirements

• High Estimate 1.9 Million Metric Tons
• 36 Billion in Damage
• High Intensity Assumption
• High Rebuild/Repair Ratio
• Low Estimate 450,000 Metric Tons
• 12 Billion in Damage
• Low Intensity Assumption
• Low Rebuild/Repair Ratio

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Infrastructure Requirements

• High Estimate 3.4 Million Metric Tons
• 15 Billion in Damage
• High Intensity Assumption
• High Rebuild/Repair Ratio
• Low Estimate 2.1 Metric Tons
• 10 Billion in Damage
• Low Intensity Assumption
• Low Rebuild/Repair Ratio

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Total Requirements
Rebuilding takes place over five year period
Implies roughly 1million to 2 million additional
tons per year
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Cement Outlook Hurricane Adjustments
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National Economic Construction Impacts
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National Economic Growth
Positives
X
- - - X -
X X X X X X
X X X X X X
Easing Energy Prices Lower Inflation Recovery In
Consumer Spending Rebuilding Period Stronger Job
Gains
IV 2005
I
II
III
IV
2006
Negatives
Higher Energy Prices Higher Inflation Erosion in
Consumer Spending Weak Job Gains Regional
Economic Disruption
X X X X X
X X X X X
- - - - X
-

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Post Hurricane Oil Price Scenario
West Texas Intermediate
Rita Revision
Katrina Revision
Summer Forecast
55
Post Hurricane Inflation
Percent Change, CPIU
Hurricane Revision
Summer Forecast
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Post Hurricane Consumer Sentiment
Conference Board Survey
Summer Forecast
Hurricane Revision
57
Post Hurricane RGDP Scenario
Annual Growth Rate,
Summer Forecast
Hurricane Revisions
58
Post Hurricane Job Creation
Average Thousand Net Jobs Created Per Month
Summer Forecast
Hurricane Revision
59
Cement Outlook Hurricane Adjustments
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Cement Outlook Hurricane Adjustments
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Conclusions

• Near term economic growth will suffer
• Pre-Hurricane Strength Implies No Recession
• Rebuilding adds to growth in 2006 beyond
• Supply disruptions partially balanced by reduced
  near term demand
• Nevertheless, markets will tighten in Mississippi
  Valley Region
• Extra demand for rebuilding of New Orleans
  carries uncertainty

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United States Cement Outlook

• PCA Joint Meeting
• September 27, 2005
• Chicago, Illinois
• Edward J. Sullivan
• Staff Vice President and PCA Chief Economist