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Construction Outlook: 2011-2015

Independent Equipment Dealers Association February 2011. Construction Outlook: 2011-2015. Ed Sullivan, Chief Economist PCA. Named Most Accurate Forecaster By Chicago Federal Reserve, 2009. Real Construction Spending Billion Real $1996. -44%.

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Construction Outlook: 2011-2015

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  1. Independent Equipment Dealers Association February 2011 Construction Outlook: 2011-2015 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

  2. Real Construction SpendingBillion Real $1996 -44%

  3. Cement Capacity Utilization Percent Capacity Utilized Excess Capacity, Depressed Earnings

  4. Economic Outlook

  5. Economic Adversity Abates 2011/12 2007 2010 2006 2008 2009 2011 Sub-Prime/Exotics Energy The abatement of the conditions that put us in recession…are receding…but remain in place. Lending Standards Labor Markets State Deficits

  6. Synchronized Recovery Theory Job creation determines how quickly the recovery cycle spins. In the context of moderating productivity Gains Leads to: Defaults & perceived lending risks decline Sentiment includes Consumer, Business & Banks:

  7. Commercial Risk PremiumsSpread between Treasury and BAA Corporate Risk Premiums Serve as a Proxy for Bank Lending Attitudes Toward Risk Projected 2010 2012 2011 Source: Federal Reserve, PCA Projections

  8. Consumer Sentiment Risks Projected 2010 2012 2011 Source: Conference Board, PCA Projections

  9. Synchronized Theory: Problem = Policy Support • Traditional Monetary Policy’s effectiveness is limited. • Interest rates already low • “Liquidity Trap” • Federal Reserve Concerned. • Didn’t Act Traditionally. • Quantitative Easing, or, QE2 is Born. • Similar to open market operations….but… • Potentially broader asset classes (harder to control money supply growth). • Blurred “easy landing” guideposts. • Under shoot = Risk Double Dip • Over shoot = Risk powerful inflationary pressures

  10. Housing Recovery

  11. Housing Starts: Recovery MutedThousand Starts

  12. 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.

  13. Foreclosures Accelerate Foreclosure Impacts Add to Inventory Depressed HomebuilderROI Depress Prices 3.4Foreclosures in 2010. 1.2 MilBank possessions. Equates to one out of every 4 homes on the market. Adds supply. Bank owned properties discounted. Pressures new home prices. Longer carry costs. Lower revenues. Erodes expected ROI. Delays recovery in starts.

  14. Residential: Re-Set Scenario$ Billion Alt-A Subprime Resets Option Adjustable

  15. Residential: Bank Possession ProjectionsMillion Homes

  16. Months’ Supply: Single FamilyNumber of months required to burn off existing inventory at current selling rates Projected Source: PCA Projections

  17. Single Family Starts ProjectionsThousand Homes

  18. Single Family Starts ProjectionsThousand Homes

  19. Single Family Starts ProjectionsThousand Homes

  20. Residential: Upside RisksThousand Starts Pessimists Optimists

  21. Nonresidential Drag

  22. Nonresidential Conclusions • No longer a significant drag on construction activity. • Large imbalances exist in before a positive NOI materializes • Slow job growth implies slow healing process • Credit environment hostile. • Conditions for positive ROI years off. • Not a significant contributor to cement consumption growth until 2013

  23. Office Buildings: Recovery Process 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

  24. Office Recovery TimingThousand Office Jobs 2.4 million office jobs lost

  25. Office Buildings Recovery Timing 32.0Million Office Jobs Equates to Full Occupancy 27.5 Million Office Jobs Equates to Stable Leasing Rates 27.0 Million Office Jobs Today Implying….. Since 1 in 5 Jobs Are In The Office 500,000 Office Jobs must be created before leasing rates stabilize This equates to a total job creation number of roughly 2.5 million Jobs This condition may not materialize until 2012

  26. Nonresidential Construction ProjectionsBillion Real $1996

  27. Nonresidential Construction ProjectionsBillion Real $1996

  28. Public Recovery

  29. ARRA Spending Composition AssumptionsBillion $ Resurfacing Bridge Widening & New Route Chart Excludes “Other” Spending

  30. WA NH ME MT VT ND OR MN ID NY MA SD WI RI WY MI CT IA PA NJ NE OH NV IN DE UT IL CO MD WV CA VA KS MO KY NC TN AZ OK NM AR SC GA AL MS LA TX FL HI State Fiscal Conditions FY 2011 Budget Gaps Source: PCA/CBPP Oct. 2010 No Shortfall Over 20% Under 11% 11%-20%

  31. State Deficits$ Real Slow Job Creation Leads to Slow Deficit Heal National Estimates: States Do Not Heal in a Synchronized Fashion

  32. Discretionary State Highway Cement ConsumptionThousand Metric Tons

  33. SAFETEA-LU Math 2010 2011 SAFETEA-LU - Delay in Extension -1 to -2 MMT 0 MMT - Recapture 2010 ----- +1 to +2 MMT Volume Impact - 1 to -2 MMT +1 to +2 MMT Net Change 2011 (No Delay) +2 to +4 MMT

  34. Portland Cement Consumption: HighwayThousand Metric Tons Stimulus State Discretionary Highway Bill

  35. Beyond the Crisis “New Normal” or “New Headaches”

  36. Real Construction SpendingBillion Real $1996

  37. After the Crisis: “New Normal”: Economics • American consumer, the engine of US economic growth • May distance from debt spending patterns (lowering GDP). • Baby boomers may not re-capture wealth • Higher inflation erodes spending. • Impacts • Slower growth – Is 50 basis point enough?

  38. After the Crisis: “New Normal”: Policy • Fiscal Policy • Stimulus spending must be paid for…resulting in higher interest rates, higher taxes, and potentially higher inflation. • Monetary policy easing (U.S. & global) & QE2 • Could add to inflationary pressures. • QE2 compounds the inflationary risks. • Raises prospects of Federal Reserve tightening. • Weakens dollar in context of large public debt. • Heightens debt costs. • Opens door for fiscal austerity. • Key economic consequences • American consumer, the engine of US economic growth, may distance from debt spending patterns (lowering GDP). • Dollar may show a structural weakening. • …combining for the potential of slower longer term economic growth (50 basis points).

  39. After the Crisis: “New Normal”: Construction • Not a typical recession recovery. • Amplified by structural corrections. • Amplified by possible policy errors. • Long impacts • Pent-Up Demand • Being generated across all sectors. • Longer period of distress, more pent-up demand • Timing and magnitude of release impacted by economy. • Regional impacts from resulting growth. • Residential, nonresidential & public synchronized – 2013 & Beyond. • Typically suggests strong cement consumption growth rates.

  40. After the Crisis: “New Normal”: Global • Emerging economies, led by China/India, account for key growth drivers. • Accounts for larger share of world GDP than OECD by 2014 (IMF). • Exerts “new” potent demand on world markets • “Synchronized” world growth returns 2013-2020. • Commodity prices (oil), freight rates, trading patterns subject to change. • Impacts concrete competitiveness (oil prices = paving position, residential ICF) • Impacts sourcing decisions – high freight rates raising import costs. • New challenges could lead to potentially new economic/political tensions.

  41. After the Crisis: “New Normal”: MIT • Researchers at the MIT Concrete Sustainability Hub are working to quantify the full cradle-to-grave life-cycle environmental and economic costs of paving and building materials. • Residential Buildings – More than 90% of the life-cycle carbon emissions are due to the use phase, with construction and end-of-life disposal accounting for less than 10% of the total emissions. • Residential Buildings – Concrete structures built with insulated concrete forms (ICF) enjoy long-term operational energy savings of 20% or more over wood-framed buildings. • In the context of synchronized world growth, higher oil prices, homebuyers may increasingly emphasize energy saving aspects of concrete homes.

  42. After the Crisis: “New Normal”: Regulation • Activist EPA • Plant shut downs • High compliance costs. • New Source regulations! • Resumption of demand growth • Import Dependence Grows • In context of weak dollar • In context of emerging economy demand growth • Higher freight rates. • Sourcing strategies • Near term, import dependence – longer term?

  43. Cement Consumption: Long Term Million Metric Tons Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution.

  44. Independent Equipment Dealers Association February 2011 Construction Outlook: 2011-2015 Ed Sullivan, Chief Economist PCA Named Most Accurate Forecaster By Chicago Federal Reserve, 2009

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