Transcript Welcome to Carter - Portland Cement Association

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Cement Outlook: 2009-2010
Ed Sullivan, Chief Economist PCA
C & D World
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Introduction: Overview
 Economic fundamentals are deteriorating
quickly.
 Private Sector no longer drives demand
 Residential & Nonresidential recoveries are not
expected to materialize anytime soon.
 Outlook shaped by policy actions.
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Introduction: Stimulus
Underlying Economic Fundamentals
And…they are deteriorating at an alarming rate!
Stimulus Size
Stimulus
Details
Stimulus
Effectiveness
Stimulus
Timing
Cement/Concrete Volume Estimates
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Underlying Economic Fundamentals
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States in Recession
July
December
October
January
May
2007
2008
WA
NH
MT
ME
VT
ND
OR
MN
ID
SD
RI
WY
MI
CT
IA
PA
NE
NV
MA
NY
WI
UT
IL
OH
IN
CO
DE
MD
WV
CA
KS
NJ
VA
MO
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
LA
TX
AK
FL
HI
Recession
At Risk
Growing
Source: PCA/BLS
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Underlying Fundamentals
 Lacking stimulus, the economy enters a deep and long contraction
 GDP declines 3.5% in 2009 and another 1.5% in 2010
 An additional 6 million more jobs lost and unemployment reaches
11% during 2009-2010
 State deficits reach $79 billion in 2009, $102 billion in 2010.
 Conservative estimates
 Cement consumption declines 19% in 2009 followed by another
9% in 2010.
 May serve as an indication for steel shipments
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Economic Outlook: Five Factors
Sub-Prime
Mortgage
Payments
Financial
Crisis
Energy/
Inflation
Defaults
Structural Global
Realities
Write-Downs
Credit Cards
Gasoline Prices
Risk Aversion
Defaults
Tight Lending
Standards
Home Price
Declines
Reliance on
Home Equity
Gone
Heating Prices
Tight Lending
Standards
Fertilizer/Biofuels
hit Ag Prices
Commercial,
Consumer,
homeowner
capital access
reduced
Supply Side
Costs Ingrained
Cost of Business
Global
Adds Weakness
to Dollar
Labor
Markets
Slower Economic
Growth
State
Deficits
Slower Job
Revenues Slow
One Million Job
Loss in 2008
Housing Recovery
Delayed
Nonresidential
Declines
State Fiscal Crisis
Looming
Public Declines
Entitlement
Programs Continue
Deficits
Drag on Recovery
Offsets Possible
Federal Stimulus
Package
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Economic Adversity
2006
Sub-Prime
Energy
Financial
Crisis
Inflation
Labor
Markets
State
Deficits
2007
2008
2009
2010
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Net Job Creation (Loss)
- Annual Change, Thousand Net Jobs
4,000
3,000
2,000
1,000
0
1999
2001
2003
2005
2007
2009
-1,000
-2,000
-3,000
-4,000
Job Loss 2009 = 4.1 Million
-5,000
Job Loss 2010 = 1.8 Million
Unemployment Peaks at +11% Early-2010
2011
2013
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Consumers feel the crunch…
Annual Percent Change
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Portland Cement Consumption
Thousand Metric Tons
140,450
120,450
100,450
50 MMT
80,450
60,450
40,450
20,450
450
1998
2000
2002
2004
2006
2008
2010
2012
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Capacity Utilization Rates
Clinker Production/Clinker Capacity
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
2006
2007
2008
2009
2010
2011
2012
2013
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No Stimulus Job Loss Estimates
Million Jobs
2008
2009-2010
2009-2010
Obama
Economists
PCA
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Point One
Regardless of Stimulus’ Effectiveness, Laid Atop Weaker Fundamentals
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Point One
 Regardless of Stimulus’ Effectiveness…it will
be laid atop dramatically weaker
fundamentals……
 …Impacting volume estimates for 20092010
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Stimulus Size: Expectations for Growth
Stimulus Not a Silver Bullet…and..the untold Story on Expectations
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“Stimulus Timeline
Policy Tool
Objective
2009
Job Saving
Phase I
Phase II
Phase III
Tax Cuts,
Entitlement
Spending,
State Aid
Shovel
Ready
Projects
Long Term
Investments
Stabilize
Economy,
halt adverse
momentum
Job
Creation
Job
Creation,
Address
Structural
Economic
Issues
2010
2011
Job Creating
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Change in
GDP From No
Stimulus
Scenario
Stimulus: GDP Impacts
Obama
Economists
PCA
2009-2010
2009-2010
GDP 4th Q 2010:
$12.2 Trillion
GDP 4th Q 2010:
$11.6 Trillion
Note: Stimulus in PCA Outlook Overlaid upon
weaker Fundamentals.
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Stimulus: Job Creation Estimates
Million Jobs
Obama
Economists
PCA
2009-2010
2009-2010
Unemployment:
7.0%
Unemployment:
8.8%
Job Estimates have large impacts on
Cement/Concrete recovery assessments.
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Economic Growth Outlook
Percent Change, GDP Growth Rate
Recession
Scenario: With
Stimulus
Recession Scenario:
No Stimulus
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Point Two
Expectations Vs Reality: More Stimulus May be Needed
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Point Two
 Obama’s $789 billion plan may not be enough.
 Obama economists expect an additional 2.8 million jobs lost.
And plan aimed at creating /saving 3.7 million jobs.
 PCA estimates that 8.5 million jobs may need to be
created/saved.

Stimulus plan required = $1.5 trillion (conservative)
 And….Obama Economists implied it…..
 Taxpayer pushback, politics prevented full initiation for now…
 Don’t be surprised if a second stimulus plan materializes.
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Phase One: Tax Cuts, Entitlements, State Aid
Expectations Vs Reality: More Stimulus May be Needed
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“Stimulus Timeline
Policy Tool
Objective
2009
Job Saving
Phase I
Phase II
Phase III
Tax Cuts,
Entitlement
Spending,
State Aid
Shovel
Ready
Projects
Long Term
Investments
Stabilize
Economy,
halt adverse
momentum
Job
Creation
Job
Creation,
Address
Structural
Economic
Issues
2010
2011
Job Creating
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Phase One: Impacts on Construction
 Tax cuts, Entitlement spending and State
Aid are not going to boost construction
from 2008 levels…..
 …..they are going to improve conditions
that would have transpired without
stimulus during 2009-2010.
 Job saving…Concrete Volume Saving
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Phase One: Tax Impacts on Construction
 Tax cuts improve extremely adverse economic conditions.
 Accent on Job Savings
 Lags suggest roughly half of tax cuts impacts materialize in
second half of 2009 and first half of 2010.
 Impacts dissipate quickly.
 Impacts on construction activity are modest.
 Cement SAARs increase roughly 1% late 2009/early 2010,
compared to a no stimulus scenario .
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Phase One: State Aid Impacts on Construction
 State Aid reduced fiscal hardship facing states.
 94% of all public construction performed by state and local
governments.
 Current state fiscal crisis estimated to be 5 times worse that
2002-2003 “crisis” – measured by potential deficits.
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2009 Fiscal Deficits
Deficit % Share of Total Expenditures
WA
NH
MT
ME
VT
ND
OR
MN
ID
NY
SD
MA
WI
RI
WY
MI
CT
IA
PA
NE
NV
UT
IL
IN
DE
CO
MD
WV
CA
KS
NJ
OH
VA
MO
KY
NC
TN
AZ
OK
NM
AR
SC
MS
AL
GA
LA
TX
FL
HI
No Deficit
Source: PCA/Census
0-10%
11%-15%
16% +
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Fiscal Health – Sum of States
Surplus/Deficit Index, 2005=100
150
100
50
Surplus
0
Deficit
-50
-100
-150
-200
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
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Phase One: State Aid Impacts on Construction
 Fiscal hardship facing states: No stimulus scenario
suggests:
 500,000 state /local employee layoffs in 2009,
650,000 layoffs in 2010
 Tax increases
 Deep cuts in spending
 Priorities to fund entitlements: Medicaid
 Construction spending faces dramatic cuts.
 50% of cement consumption – hard infrastructure.
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Phase One: State Aid Impacts on Construction
 State reaction to Federal Funds
 Reduce or forego layoffs
 Fund entitlement programs
 Reduce or forego tax increases

These state reactions reduce potential money directed to
construction.
 Nevertheless, state aid is largest contributor to
construction activity during “Phase I”
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Phase Two: Shovel Ready
Expectations Vs Reality: More Stimulus May be Needed
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“Stimulus Timeline
Policy Tool
Objective
2009
Job Saving
Phase I
Phase II
Phase III
Tax Cuts,
Entitlement
Spending,
State Aid
Shovel
Ready
Projects
Long Term
Investments
Stabilize
Economy,
halt adverse
momentum
Job
Creation
Job
Creation,
Address
Structural
Economic
Issues
2010
2011
Job Creating
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“Shovel Ready” Timeline
Jan
Feb
March April
May
June
July
August
House Bill
Obama
Inaugurated
Senate
Passes &
Bill Signed
Federal
Paperwork
State
Paperwork
Bid Letting
Bid Review
Contractor
Paperwork
Construction
Begins
Job Creation May
Come Later Than
Many Expect
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Phase Two: Ready to Go
 Projects that can be undertaken within 120 days.
 Paint a bridge Versus new ramp for a bridge.
 Resurface a road Versus Expand a road
 Low cement intensities per $ spent.

These programs will create jobs and cement volume
increases...but not as many as “Hard” infrastructure
investment.
 Panic to spend Versus Patience and Payoff
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Stimulus: Infrastructure Job Creation Estimates
Percent Job Premium
Compared to A
Resurfacing
Reconstruction,
Capacity
New Bridge
Major Widening
New Route
Bridge
Replacement
Concrete Intensive Projects Create More Jobs Than Resurfacing
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Point Three
Significant Relief for Construction does not Materialize in 2009
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Point Three
 Due to administration lags.. potential
construction impacts begin to materialize
late third quarter/early fourth quarter…
 …and…”shovel ready” projects carry very low
cement intensities….
 …leaving 2009 volume impacts muted.
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Phase Three: “Hard” Infrastructure
Expectations Vs Reality: More Stimulus May be Needed
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“Stimulus Timeline
Policy Tool
Objective
2009
Job Saving
Phase I
Phase II
Phase III
Tax Cuts,
Entitlement
Spending,
State Aid
Shovel
Ready
Projects
Long Term
Investments
Stabilize
Economy,
halt adverse
momentum
Job
Creation
Job
Creation,
Address
Structural
Economic
Issues
2010
2011
Job Creating
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Economic Growth Outlook
Percent Change, GDP Growth Rate
Recession
Scenario: With
Stimulus
Recession Scenario:
No Stimulus
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Adding it Up
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Spending Details
Millions of $
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Stimulus Scenario – Cement Demand
Fall Forecast
Annual Change
2009
85,485
-11.6%
2010
83,327
-2.5%
2011
91,507
9.8%
No Stimulus
Annual Change
76,950
-19.0%
70,025
-9.0%
76,327
+9.0%
5,004
500
5,504
16,972
3,394
20,366
6,641
13,281
19,922
82,454
-13.2%
90,391
+9.6%
96,248
+6.5%
Direct Tons
Indirect Tons
Total Added Demand
Total Market (With Stimulus)
Annual Change
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Total Added Cement Consumption – U.S.
000 Metric Tons
25,000
20,000
15,000
10,000
5,000
0
2009
Aid-toStates
Source: PCA
2010
Infrastructure
Investment
2011
Indirect
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Percent Increase In Consumption
Compared to No Stimulus
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Stimulus: State Impacts
Added Cement Demand: 2009-2011
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source: PCA
California
Texas
Florida
Ohio
Illinois
Pennsylvania
Georgia
New York
Arizona
Virginia
North Carolina
Indiana
Missouri
Wisconsin
Louisiana
(000)
MT
6,080
4,860
3,266
1,744
1,718
1,664
1,600
1,523
1,271
1,097
1,052
923
919
905
889
Share of Total
(%)
13.4
10.7
7.2
3.8
3.8
3.7
3.5
3.4
2.8
2.4
2.3
2.0
2.0
2.0
2.0
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Portland Cement Consumption
Thousand Metric Tons
140,450
120,450
100,450
80,450
60,450
40,450
20,450
450
1998
2000
2002
2004
2006
2008
2010
2012
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Point Four
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Point Four
 Stimulus gains are substantial beginning in
second half of 2010...
 …But even with these gains…past cyclical
peaks are not expected to materialize until
2015.
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Implications
Market Imbalances
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Capacity Expansion
Thousand Metric Tons
10,000
8,000
Stated Capacity
Expansions
Potential Increases
From Specification
Changes
6,000
4,000
2,000
0
2006
2007
2008
2009
2010
2011
2012
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Market Imbalances
- Changes in Cement Consumption Tons + Capacity Expansion Tons
25,000,000
20,000,000
15,000,000
2007
1974
1991
10,000,000
1981
2002
5,000,000
0
-5,000,000
-10,000,000
1980-82
1990-91
2000-01
2007-2010
-15,000,000
1970
1973-74
1980
1990
2000
2010
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Import Volume
Thousand Metric Tons
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Capacity Adjustments *
Thousand Metric Tons
Capacity
Adjustments Due to
Delayed Expansions
and Plant Closures
* Adjustments Include Five Delays in Plant Commissioning and Eleven Plant Closures
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Capacity Utilization Rates
Clinker Production/Clinker Capacity
100.0%
95.0%
90.0%
85.0%
80.0%
75.0%
70.0%
65.0%
60.0%
55.0%
50.0%
2006
2007
2008
2009
2010
2011
2012
2013
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Point Five
Industry Hardship Eases, But Not Avoided with Stimulus
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Point Five
 Stimulus will provide some relief….
 …but hardship facing the industry will not be
avoided…
 Further plant closures will materialize in the
context of market imbalances.
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Beyond the Crisis
Stimulus Payback in context of Global Recovery
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Introduction: Overview
 Cyclical correction is temporary.
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Point Six
Spending Payback: Softer Economic Growth
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Point Six
 Spending must be paid for…resulting in
higher interest rates, higher taxes and
potentially higher inflation….
 …and…American consumer..the engine of
US economic growth may show significantly
different spending patterns…
 …combining for the potential of slower
longer term economic growth (50 basis
points).
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The Economic Recovery
2008
Sub-Prime Drag Abates
Bank Lending Aversion
Improves
Stimulus Gains
Employment Traction
Lending Risk Declines:
Credit Easing
Energy Stimulus
State Deficits
Improve
Pent-Up Demand
Released
2009
2010
2011
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Single Family Housing– United States
000 Starts
Pent-Up Demand
Interest Rates low, Decline in Home Price, Job
Recovery Translate into Improved Affordability
Excess Inventories Worked Off
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Nonresidential Long Term Trend
Million Real $, 1996
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Current:
Gasoline Prices Vs Asphalt Prices Per Barrel
Price Per Barrel
120
100
1990-2003:
Average Differential = $15
80
60
40
20
0
FY1990
FY1996
FY2002
FY2008
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Gasoline - Asphalt Margin Per Barrel Differential
- Net Threshold of $14 Per Barrel
Price Differential Per Barrel
Threshold Differential = $14 per barrel Estimated on a
Ten Year Payoff for Coker Investment
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Announced New Coker Installations
Cumulative: Thousands of Barrels Per Day
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Liquid Asphalt Supply
Thousands of Barrels
44 Million
Barrel Decline
by 2011
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Projected:
Initial Bid Concrete Vs Asphalt Paving Costs
Per Two Lane Road Mile - Urban
Asphalt
Concrete
Parity Achieved in Fiscal 2009
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Projected:
Life Cycle Concrete Vs Asphalt Paving Costs
Per Two Lane Road Mile - Urban
Asphalt
Concrete
Concrete Advantages Materialize in Fiscal 2009
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Point Seven
A “V” Shaped Construction Recovery?
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Point Seven
 Once recovery is in place….
 And despite payback costs for stimulus…
 Concrete construction could record large
and sustained gains in growth.
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Cement Outlook: 2009-2010
Ed Sullivan, Chief Economist PCA
C & D World