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Cement Outlook: 2007

Slower growth outlook depresses expected ROI and tempers recovery. High material costs ... Cement Outlook: 2007. World of Concrete. Las Vegas, Nevada. Edward J. ...

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Cement Outlook: 2007

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    Slide 1:Cement Outlook: 2007

    World of Concrete Las Vegas, Nevada Edward J. Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve 11

    Slide 2: Economic Comfort Index *

    1996=100 Combines Real GDP Against the Levels Interest Rates, Inflation and Unemployment Most Favorable Economic Conditions Since the 1960s

    Slide 3:Economic Outlook

    Slide 4:Snap Shot of Economic Activity

    Consumption acts as the anchor for US economic activity. Any retrenchment in consumer spending will lead to slower economy-wide growth rates

    Slide 5:Consumer Worksheet

    Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%. State and Local Property Taxes Rise. Reassessments based on high home appreciation Energy Prices Take a Large Bite. Even in context of recent improvement. Inflation Running near 3% Interest Rates Rising in Context of Record Consumer Debt Tapping Home Equity Not as Viable As In the Past Slowdown in Job Creation Consumer Growth Rate Under Pressure

    Slide 6:Economic Outlook

    No Bleeding from Housing

    Slide 7:Housing Threat

    Real threat to economic growth not the decline in housing.. But.. The way we financed the past boom And Its impact on consumer spending.. Potentially more profound in history

    Slide 8:Growing Home Price & Income Gap

    Annual Growth Rate Comparison Home Prices Household Income

    Slide 9:Emergence of Exotic Mortgages

    Interest Only Loan Share of Sub-Prime Market Share by Principle Balance: Solid Green Share by Loan Count: Striped Yellow Note: Sub-Prime accounts for 36% total mortgage market

    Slide 10:Sub-Prime Mortgage Resets

    Total Loans Scheduled for Reset Period of Emerging Trouble

    Slide 11:Economic Outlook : Real GDP Growth

    ----------2005---------- -------2006------- -------2007------ 2005: 3.5% Real GDP Annual Growth Rate -------2008------- 2006: 3.1% 2007: 2.6% 2008: 2.4% Risks On Downside: 2008

    Slide 12:Construction & Cement Outlook

    Overview

    Slide 13:Total Construction Billion 1996 $

    2007: -1.8% decline projected BUT.. based off record levels ==

    Slide 14:Cement Intensities

    Slide 15:Composition Of Cement Growth: Construction Activity Vs Cement Intensity Growth

    Cement Intensity Growth Cement Intensity Growth Cement Intensity Growth Construction Activity Growth Construction Activity Growth Annual Percent Change, Real Put-In-Place Construction & Cement Intensity

    Slide 16:Concrete: Run-up in Competing Material Prices

    Annual Percent Change, PPI, Bureau of Labor Statistics Concrete Asphalt Steel

    Slide 17:Concrete: Improving Competitive Position

    Change Relative Price Vs Concrete Asphalt Steel Rapid Improvement in Concretes Relative Pricing Position

    Slide 18:Residential Construction Single Family

    Slide 19:Strength in Starts More Than Low Rates

    The Cyclical Upside: 2001 - 2005 Low mortgage rates key factor in single family starts over past few years. Emergence of exotic mortgages also a key factorparticularly in strong home appreciation environment. Easy credit conditions contributed to strong home-buying environment. Speculators add froth to market in light of strong appreciation rates. The Cyclical Downside: 2006 - 2009 Mortgage rates rising. Exotic mortgages losing favor. Defaults and delinquencies cause a deterioration in credit quality and a tightening of credit conditions Speculators reduced/disappear in lower appreciation rate environment

    Affordability Index Most Affordable Pacific Mountain West North Central East North Central South Atlantic East South Central West South Central New England Middle Atlantic Affordability Ratio 2nd Tier 3rd Tier 4th Tier Least Affordable

    Slide 21:Profile: Single Family Buyer

    2000 Estimated 2006 Coastal and Resort Areas: Double the National Average For Speculators Note: Speculators Are 1st to Leave the Market

    Slide 22:Inventory Draw Required

    Homes on Market/Monthly Selling Rate Ten Year Average Inventory Build Required Inventory Draw Required Highest Level Since 1997 10 Years of Inventory Build Conditions Disappear

    Slide 23:Estimating the Size of Overhang and Speed of Burn Off

    What is the desired level of inventory? Historical: 5 months.Overhang = 135K Past cyclical low: 3.5 months.Overhang = 283K PCA 4 months assumptionOverhang = 233K When is excess burned off? 5 months desired supply = February 2007 4 months desired supply = July 2007 (PCA) 3.5 months desired supply = November 2007 Slow gradual gains achieved after burn off.

    Slide 24: SF Inventory Adjustment Outlook

    (000) Units Note: 70K Overhang burned off since mid-2006

    Slide 25:Nonresidential Construction Overview

    Slide 26:Nonresidential Outlook

    Billion Dollars, Real 1996 $ Projected Underlying nonresidential drivers improving. Despite large percentage gains for 2006, most markets weak from historical perspective. Past cyclical peak not realized. Slower growth outlook depresses expected ROI and tempers recovery. High material costs reduce growth. Increasing cement intensities reinforce construction activity gains. Institutional nonresidential gaining momentum; less sensitive to slower growth environment

    Slide 27:Public Construction

    Slide 28:Public Construction Outlook

    93% of public construction performed at state/local level. State/Local fiscal problems fading. Revenue growth improves with economy and job growth. Surpluses will re-emerge. Pent-up demand released. Highway Bill adds strength. 2006: +4.8% 2007: +5.5% Note: 2005: +1.9% Billion $ State Surplus/Deficit, NIPA

    MA RI NH 0-9% 20-29% 30-39% Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic 10-19% Deficit as percentage of budget $.85 $.11 $1.0 $.16 $0 $.36 $.4 $.98 $0 $1.5 $.05 $.38 $.3 $.12 $38 $3.7 $3.6 $.6 $.22 $.41 $1.0 $.09 $2.4 $0 $2.0 $.75 $.5 $.49 $1.3 $1.7 $.2 $.2 $2.4 $9.3 $2.0 $.74 $4.6 $.14 $.4 $.15 $3.0 $.17 $.85 $.2 NJ $1.9 CT MD DE VT $.25 $1.1 $2.0 $.03 $.08 Primary Source: Newsweek July 28, 2003 Secondary Sources: Natl Conf. of State Leg., Center on Budget and Policy Priorities, Natl Assn. of State Budget Officers, Calif. Budget Project Dollar figures, in billions, indicate amount states had to save to balance 2004 budget. KEY Public Construction Outlook: State Deficit Estimates Fiscal Year 2004 MA RI NH Public Construction Outlook: State Deficit Estimates Fiscal Year 2005 0-9% 20-29% 30-39% Pacific Mountain West North Central East North Central South Atlantic East South Central District of Columbia West South Central New England Middle Atlantic 10-19% Deficit as percentage of budget $0 $0 $0 $0 $.3 $1.1 $.17 $15 $0 $2 $.5 $.34 $.71 $.19 $.0 $.6 $.62 $.17 $.9 $0 $5.1 $5 $.14 $0 $1.5 $.19 $.74 NJ $.2 CT MD $.93 $.8 Secondary Source: National Association of Budget Officers Dollar figures, in billions, indicate amount states had to save to balance 2005 budget. KEY No available data DE $0 $0 $.9 $0 $.6 $.2 $.9 $0 $.21 $0 $0 $0 $.3 $0 $.5 $0 $0 VT $0 $.12 $0 Primary Source: Center on Budget Policy and Priorities Feb / 04

    Slide 31:Market Conditions

    No Shortage Tight Supplies Cement Supply Survey Summer 2006 Spot Tight Supplies Import Volume & Freight Rates Import Volume, Million Metric Tons Freight $ Per Ton, Handymax, Asia-Gulf Imports 1st Half 2007: 42 MMT Rate Imports 2006: 33.6 MMT Net Increase (SAAR): 8.4 MMT Consumption Growth Rate: 1 MMT 7 MMT (SAAR) Overhang Import Volume & Freight Rates Import Volume, Million Metric Tons Freight $ Per Ton, Handymax, Asia-Gulf 2nd Half 2006: Import Rate Contracts Some Re-Tightening of Market

    Slide 35:Conclusions

    Slide 36:Cement Outlook: 2007

    World of Concrete Las Vegas, Nevada Edward J. Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve 11

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