Cement Industry Outlook

1
Cement Industry Outlook

• David Czechowski, Senior Economist

CalCIMA Annual Education Conference October
15th, 2009 Squaw Valley, CA
2
Obscure Economic Indicators

• The Good!
• Titanium Dioxide Prices are Up
• The Bad!
• Womens Dress Sales contracting
• New Golf Course Construction at a standstill
• The Confusing!
• Buy American Buy Canadian Buy China
• May not risk contaminating their supply chain

3
Overview

• Economic fundamentals are improvingbut
• 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
• Outlook shaped by policy actions
• American Recovery and Reinvestment Act (ARRA)
  reveals bureaucratic delays
• Tilts impact toward 2010-2011

4
Portland Cement Consumption
Thousand Metric Tons
Capacity Displacement 2009 8.5 MMT (14 Plants)

• 50 MMT

Stimulus provides some relief but hardship
unavoidable and further plant actions may
materialize
5
Economic Assessments
Dont Mistake Recovery for Expansion
6
Economic Adversity Abates Mid-2010
2006
2008
2007
2009
2010
Sub-Prime
Energy
Financial Crisis
Labor Markets
State Deficits
7
Job Recovery Past Recessions Change, Thousands
of Jobs
1980-1982
1990-1991
2000-2001
Current Recession
Months
8
Stimulus Timeline
2011
2010
2009
Policy Tool
Objective
Job Saving
Stabilize Economy, halt adverse momentum
Tax Cuts, Entitlement Spending, State Aid
Phase I
Job Creating
Shovel Ready Projects
Job Creation
Phase II
Job Creation, Address Structural Economic Issues
Long Term Investments
Phase III
Bureaucratic Delays have Diminished the Potential
Stimulatory Impact of ARRA
9
Key Assessments

• Sustainable consumer spending growth will not
  materialize until labor markets recover
• Job losses and high unemployment rates depress
  income growth
• Consumer Sentiment is improving
• Consumer in a saving mode
• Bank write-offs continue, delays lending easing
• Residential is a neutral contributor
• Low ROI hinders business investment recovery
• Inventories will add strength..but less than
  expected
• Inventory/Sales Ratio remains high

Real GDP 2009 - 3.0 2010 1.3
10
Residential
Please remain seated until the middle of next
year!
11
New Home InventoryMonths Supply
Forecast
12
Single Family Starts
Pent-Up Demand, Inventories Lean, Interest Rates
low, Decline in Home Price, Job Recovery
Translate into Improved Affordability
(000 Units)
- 29.6 MMT
59 of Total Cement Consumption decline is
attributed to residential
13
Nonresidential

• Dramatic Declines Ahead, Recovery Begins in
  late-2011

14
Nonresidential Cement ConsumptionThousand Metric
Tons
- 8.2 MMT
16 of Total Cement Consumption decline
attributable to Nonresidential
15
Nonresidential Credit Crisis

• Revenues down due to rising vacancies and
  pressure on leasing rates
• More than 60 5 year balloon mortgages
• Many taken during last cyclical peak 05 06
• Coming due in 2010
• More than 20 financed via Mortgage Backed
  Securities
• Not the financial instrument it used to be

16
Public
ARRA Impact Delayed
17
Stimulus Plan

• May Not Be Enough!
• Obama economists expect an additional 2.8 million
  jobs lost Plan goal is an optimistic 3.7 million
  jobs created/saved
• PCA estimates that 8.5 million jobs may need to
  be created/saved
• Stimulus plan required 1.5 trillion
  (conservative)
• Taxpayer pushback, politics prevented full
  initiation
• Dont be surprised if a second stimulus plan
  materializes
• New Highway Bill may fit requirement
• Delayed passage dovetails with 10 unemployment
  and may fly under radar and taxpayer pushback

18
Shovel Ready Timeline
Feb
May
June
Jan
March
April
July
August
House Bill
Obama Inaugurated
Senate Signoff
Federal Paperwork
State Paperwork
Bid Letting
Bid Review
Contractor Paperwork
Construction Begins
19
ARRA Weekly Highway Construction
SpendingDollars (Trend No Seasonal
Consideration)
Forecast
20
Discretionary Spending - State Local
Highway/StreetMillion 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 2009-2010
21
Highway Spending Composition
2012
2004-2009
22
Public Cement ConsumptionThousand Metric Tons
- 15 MMT
23 of Total Cement Consumption decline is
attributed to Public
23
U.S. Cement Consumption Outlook

• Consumption declines this year..mild rebound in
  2010
• Large capacity increases magnify potential market
  imbalances
• Utilization Rates decline
• Past peak (2005) not realized until 2015
• Imports record large, sustained declines
• 2008 - 49
• 2009 - 46 (6.2MMT)
• 2010 - 3

24
After the Crisis
25
Assessments

• Stimulus spending must be paid for
• Higher interest rates, taxes and likely inflation
• The American consumer..the engine of growth..may
  show significantly different spending patterns
• Slower long-term growth and release of pent-up
  demand
• Substantially improved competitive paving
  advantages
• Large increase in the highway bill
• More cement intensive projects
• Green Initiatives

26
Initial Bid Concrete Vs Asphalt Paving Costs
(Projected)Per Two Lane Road Mile - Urban
Asphalt
Concrete
27
Regulatory Impacts
28
U.S. Supply Balance Mercury Climate Change
Million Metric Tons
No Expansion
Cement Consumption
Imports60 MMT
Hg Policy
Hg Climate Change
Cement Production
NESHAP Could OPEC the U.S. Cement Industry
29
California Snapshot
An Economy Run Aground
30
Employment Trends - California
Y-Y
Change
15
10
5
Total
0
-5
-10
Construction
-15
3MMA
-20
01
02
03
04
05
06
07
08
09
31
Single Family Housing Permits - California
000 Permits
2007 - 35 2008 - 52 2009 - 36 2010
4 2011 92
32
Cement Composition - California
2005
2009
16
34
20
49
64
17
Public
Nonresidential
Residential
33
Cement Clinker Imports
Y-Y
Change
2006 6.9 mmt 2007 3.6 mmt 2008 1.0 mmt 2009
.4 mmt (est.)
California Customs District (LA/SF/SD)
100
50
0
-50
3MMA
-100
00
01
02
03
04
05
06
07
08
09
34
Portland Cement Consumption
Y-Y
Change
Southern California
40
20
0
Northern California
-20
-40
00
01
02
03
04
05
06
07
08
09
35
Portland Cement Consumption
Forecast 2008 - 24 2009 - 24 2010
11 2011 15
Million
California
Metric Tons
20.0
15.0
10.0
5.0
0.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
36
California Assessment

• Performance Indicators Remain Weak
• Employment Contracting Through next year
• Debt Loads and Lack of Confidence Worried
  Consumer
• Residential Construction Markets Sliding
• Bottom late next year Little help to cement
• Nonresidential Construction Has Lost All Luster
• Victimized by Tight Credit and Lack of Demand
• Public Construction - Hardly the Silver Bullet
• Requirements plentiful but deficit/discretionary
  funding may be difficult
• Cement volumes materialize when traditional
  momentum gains speed

37
The Concrete Canoe is Still Afloat!
38
Cement Industry Outlook

• David Czechowski, Senior Economist

CalCIMA Annual Education Conference October
15th, 2009 Squaw Valley, CA