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Cement Industry Outlook

Cement Industry Outlook. David Czechowski, Senior Economist. CalCIMA Annual Education Conference October 15 th , 2009 Squaw Valley, CA. Obscure Economic Indicators. The Good! Titanium Dioxide Prices are Up The Bad! Women’s Dress Sales contracting

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Cement Industry Outlook

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  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! • Women’s 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 improving…but • 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. “Don’t Mistake Recovery for Expansion” Economic Assessments

  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 Objective Policy Tool 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 • Don’t 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 May June Feb March July August Jan April 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 Imports:60 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.) 100 California Customs District (LA/SF/SD) 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

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