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Cement Outlook: 2010-2014
PCA Spring Board Meeting
April 2010
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009
Overview
Portland Cement Consumption
Thousand Metric Tons
- 54 MMT
Growth Rates
2007: - 9.6
2008: - 15.1
2009: - 26.9
Point One
Market May have reached a Trough Point – Earlier Than Expected
Portland Cement Consumption
SAAR, Thousand Metric Tons
2008
2010
Portland Cement Consumption: No Snow, No ARRA
SAAR, Thousand Metric Tons
No Snow,
No ARRA
2008
2010
Portland Cement Consumption: Trough Point
SAAR, Thousand Metric Tons
2008
2010
Trough Point May Have Materialized – Earlier Than Expected
 Trough point for market may have materialized during Oct 2009 – Feb 2010

PRELIMINARY ESTIMATE
 Two months – Early estimate
 Snow effects

Depressed Jan-Feb

Inflated March-April
 March up 1.5%, Snow Adjusted down 6%
 Core market conditions have improved

SAAR less snow, less ARRA

Growing at a 7% annual rate during past two months.
 Residential, Oil, Farm and possibly a flattening in state discretionary spending
Point Two
First Quarter Weakness In Context of Full Year Results
Portland Cement Consumption
Volume Change
Versus 2009
SAAR
2010 First Quarter Performance: 2 MMT in the Hole
-2,067
-943
-2,104
Portland Cement Consumption
Volume Change
Versus 2009
SAAR
2010 Performance: Fourth Quarter
2009 Total
+1,422
+ 642
+909
First Quarter Losses Are Offset by Fourth Quarter Gains
 First Quarter:


Down 15% from 2009 levels
- 2,067,000 metric tons from 2009 levels
 Fourth Quarter;

Weak 2009 performance = 62,500,000 SAAR

+ 1, 422,000 from 68,400,000 SAAR (2009 total)

14% Gain over 2009 levels
 Net: -645,000 from flat performance
 Note: April = +300,000 to +600,000 based on anecdotal information
First Quarter Losses Are Offset by Fourth Quarter Gains
 Fourth Quarter;

Weak 2009 performance = 62,500,000 SAAR

+ 3,000,000 from 75,000,000 SAAR (PCA Forecast)

20% + Gain over 2009 levels
 Net: +1,000,000 from 2009 levels
 +1.5% Year total growth if flat conditions persist in 2nd/3rd quarters
Point Three
Tepid Expected National Gains – Vary Significantly by Region/State
Portland Cement Consumption
Thousand Metric Tons
Growth Rates
2007: - 9.6
2008: - 15.1
2009: - 26.9
2010: + 5.2
2011: + 13.4
2012: + 18.4
2013: + 12.4
2014: + 8.2
- 54 MMT
National Outlook
 National outlook relatively unchanged at +5%, or, +3.5 MMT.
 Growth is dependent on:

Tepid single family housing recovery: +815,000 MT

Oil gains: +375,000 MT

Farm gains: +280,000 MT

Increased ARRA highway spending and intensities: +3,600,000 MT

Increased ARRA non-highway spending including; airports, water,
conservation : +300,000 MT to +500,000 MT
 This growth more than offsets nonresidential, multifamily & state discretionary
drags
National versus Regional Outlook
 States with:

High foreclosure exposure will not fully participate in
the modest housing recovery.

High ARRA resurfacing priorities will see less
stimulatory impact.

Little exposure to oil or farm sectors will bare brunt of
nonresidential declines.
ARRA Highway Intensities
Lowest States
Top States
1. ARIZONA
0.859
50. OREGON
0.135
2. IDAHO
0.848
49. NORTH DAKOTA
0.147
3. FLORIDA
0.781
48. MASSACHUSETTS
0.159
4. ARKANSAS
0.774
47. SOUTH DAKOTA
0.163
5. TEXAS
0.726
46. WYOMING
0.183
6. MISSOURI
0.712
45. RHODE ISLAND
0.189
7. HAWAII
0.631
44. MARYLAND
0.198
8. DELAWARE
0.600
43. MAINE
0.204
9. OHIO
0.585
42. CALIFORNIA
0.208
10. LOUISIANA
0.572
41. ILLINOIS
0.216
11. KANSAS
0.571
40. ALASKA
0.222
12. NORTH CAROLINA
0.558
39. VERMONT
0.252
Point Four
Operating Conditions Remain Adverse
Cumulative Market Imbalances
Million Metric Tons
Portland Cement : Utilization Rates
Percent Utilization Based on Clinker Capacity
Slow Demand Improvement, Digestion of New Capacity &
Inventory Reductions Will Delay Utilization Recovery
The Economic Recovery Process: How & When
There is light at the end of the tunnel….it’s just a really long tunnel
Economic Adversity Abates Mid-2010
2006
Sub-Prime
Energy
Financial
Crisis
Labor
Markets
State
Deficits
2007
2008
2009
2010
Economic Growth & Job Creation
Percent Change & Thousand Jobs
%
Jobs
Net Other GDP
Growth
Net Other = All, excluding inventory changes and ARRA impacts
Point Five
Cement recovery will occur in the context of slow economic growth
Point Five: Cement Market Recovery Will Take Place
in the Context of Slow Economic Growth
 Recent strong GDP growth distorts the underlying fundamentals of the economy…..
 While fundamentals are improving, many of the factors that gave rise to the
collapse are still operating…..
 Sluggish gains in GDP growth are expected…
 Yet….
 GDP Growth = 2.7%
 Nearly one million jobs created (170K in first quarter)
 Tightening of credit winds down, outright easing materializes in some sectors
 Vacancy rates marginally improve from current levels – beginning the process
of nonresidential recovery.
 Deterioration in state deficits may be better than expected
Ingredients for a “Recovery” in Cement
Ingredients for a “Recovery”
ThisCement
Implies continued
weak consumption
levels
during
Consumption:
+ 5.2%
2010
first half of 2010
PCA’s 5.2%
growth in 2010 translatesPublic
into 4 MMT.
Residential
This “recovery” must be considered in the context of a
54 MMT peak-trough decline.
Late 2010
Recovery in Starts.
ARRA continues to
accelerate. Cement
projects materialize
2nd half 2010
Point Six
First Half weakness, Second half Strength
Point Six
 First half of 2010 characterized by year-over-year declines.
 Turning point may have materialized sooner than expected.
 Second half gains reflecting a backend recovery.
 Very large percentage gains characterize fourth quarter.
Criteria For Housing Recovery
Residential Cement Consumption
Thousand Metric Tons
- 29.6 MMT
Residential
sector’s adverse
impact on cement
consumption has
run its course.
55% of Total Cement Consumption decline is attributed to residential
Ingredients for a Starts Recovery
Homebuilders Expected ROI
Inventory no
higher than 5
months supply
Carry costs erode
expected ROI.
Price stability
Weaker the price
increases…lower
the months supply
trigger point.
Foreclosures Accelerate
Foreclosure Impacts
Add to
Inventory
2.8 Foreclosures in 2009.
871K Bank possessions.
Equates to one out of
every 5 homes on the
market.
Depress
Prices
Depressed
Homebuilder
ROI
Adds supply.
Longer carry costs.
Bank owned properties
discounted.
Lower revenues.
Erodes expected ROI.
Pressures new home
prices.
Delays recovery in
starts.
Point Seven
Upside Risk?
 PCA’s projections lie below consensus estimates by a
significant margin.
 May imply upside risks to cement consumption …
 Roughly 1.5 million metric tons in 2010 and 2011
 Pricing recovery for new homes.
 Foreclosure assessments.
Ingredients for a Public Recovery
Ingredients for a Public Cement Recovery
Highway/Street Cement Consumption
2009: 0.6 MMT
ARRA
Stimulus
Aaa
Aaa
AA
2009: -5.4 MMT
State Fiscal
Sterilization
2010:-0.5 MMT
2010: 4.1 MMT
Outlays
accelerating.
Design & concrete
intensive projects
roll out last.
Decline in
discretionary state
cement consumption
have been massive
during past three
years.
State Sterilization
Sterilization by State Fiscal Conditions
State Fiscal Conditions
Real 1996$
State Deficits Worsen in 2010.
Highway Construction as Percent of Total Budget
Real highway/Real State Expenditures
PCA ‘s Assumptions Extremely Conservative.
Decline in State Discretionary Construction Spending
Percentage Change Real $
Discretionary State Highway Cement Consumption
Thousand Metric Tons
Point Eight
Despite a worsening in state deficits, cement drags will lessen
Point Eight
 State fiscal conditions are expected to worsen.
 Cutbacks in discretionary state construction spending will
continue.
 State construction spending strategies aimed at resurfacing
and stretching scarce dollars will continue.
 State cement consumption will decline ….but less so that
2009.
 Some suggest state cement consumption bottomed in 2009…
 Suggesting upside risk to PCA projections of 500,000 metric tons
ARRA-Led Recovery
ARRA Spending Assumptions
Billion $
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
2010
2011
2012
ARRA Spending Composition Assumptions
Billion $
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2009
Resurfacing
2010
2011
Widening & New Route
Chart Excludes “Other” Spending
2012
Bridge
Point Nine
Point Nine
 ARRA spending will more than double in 2010.
 Even at same 2009 intensities, implies a 700,000 to 800,000 metric
ton increase in 2010.
 Composition of obligated ARRA spending is disappointing.
 Nevertheless, more cement intensive projects will materialize
in 2010 – raising cement intensities.
 ARRA will be a much more potent contributor to consumption
in second half of 2010.
Nonresidential Drag
Commercial Nonresidential Drag
Thousand Metric Tons
30,000
25,000
20,000
15,000
10,000
5,000
0
1998
2000
2002
2004
2006
2008
2010
2012
2014
Oil & Farm Cement Consumption
Thousand Metric Tons
9,000
8,000
7,000
6,000
5,000
4,000
3,000
Oil & Farm
2,000
Conditions are
1,000
Favorable. Gains
in these
0 sectors
partially
offset 2000
1998
nonresidential
weakness.
2002
2004
2006
2008
2010
2012
2014
Nonresidential Drag
 Commercial nonresidential cement consumption is expected to
decline 29% in 2010, following 50% decline in 2009.
 Drag on 2010 cement consumption is less due to extremely low
2009 base.
 2009 = -6.1 MMT
 2010 = - 1.8 MMT
 Assumes intensity constant. They should increase.
 Starts versus continuing construction intensities
 Nonresidential Farm & Oil cement consumption are expected to
increase.
 2009 = -3.0 MMT, 2010 = +600,000 MT
Beyond the Crisis
Ten Year Peak-to-Peak Recovery
Cement Outlook: 2010-2014
PCA Spring Board Meeting
April 2010
Ed Sullivan, Chief Economist PCA
Named Most Accurate Forecaster By Chicago Federal Reserve, 2009