national & regional construction & cement outlook david e. czechowski - manager, sr....

National & Regional Construction & Cement

Outlook

David E. Czechowski - Manager, Sr. Economist

Economic Research

Portland Cement Association

March 3, 2006

La Crosse, WI

Key Points of Analysis

The Economy

Construction Spending

Cement Outlook

Residential

Nonresidential

Public

Demand

&

Supply

Regional Perspective

U.S. Economic Outlook

Consumer Confidence

40

70

100

130

160

Index1985=100

00 01 02 03 04 05

Consumer 70% of Overall Economy

(Change from prior month)

Nonfarm Employment

-400

-200

0

200

400

600Thousands

00 01 02 03 04 05 06

Job Growth

2004: +2.2 Million

2005: +2.0 Million

2006: +2.2 Million

Construction Employment

-60

-40

-20

0

20

40

60

80

100Thousands

00 01 02 03 04 05 06

(Change from Prior Month)

Consumer Spending Outlook

Job Creation

Affordability

Income Gains

Consumer Confidence

Inflation Moderate

Favorable Factors

No Tax Stimulus

Less Home Refinancing Activity

High Energy Prices

Rising Interest Rates

Growth in ARM’s

Slower Automotive Spending

Unfavorable Factors

Strong, But Slower Consumer Spending Growth

Corporate Profit Recovery

200

500

800

1100

1400$ Billion

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Real InvestmentNonresidential Structures & Equipment

-20

-10

0

10

20

30

40

Qtr/Qtr% Change

90 92 94 96 98 00 02 04 06

Shaking off Skittishness!Pent Up Demand

Investment Spending Outlook

Higher Expected ROI

Pent Up Demand

Higher Profits = Internal Funds

Low Interest Rates = External Funds

Favorable Factors Unfavorable Factors

Strong, But Slower Investment Spending Growth

Energy Prices

Federal Funds Rate Outlook

0.0

2.0

4.0

6.0Percent

03 04 05

Fed Gradualism

Restrictive Stance

Accommodative Stance

06

GDP Growth

-2

0

2

4

6

8

10

Qtr-Qtr% Change

00 01 02 03 04 05 06

2.7%1.6% 4.2%

Inflationary Pressures

Auto/Housing/Consumer survived

2006: 3.3%

2007: 2.9%

3.5%

Economic Outlook: Summary

Economic Growth Will Be SustainedEconomic Growth Will Be Sustained

and Prevents Recessionand Prevents Recession

Consumers Maintain Spending at Slower PaceConsumers Maintain Spending at Slower Pace Investment Spending ContributesInvestment Spending Contributes Labor Markets Keep PaceLabor Markets Keep Pace

Risks are DistantRisks are Distant

High Energy Costs Lower Spending ActivityHigh Energy Costs Lower Spending Activity Rapid Rise in Interest RatesRapid Rise in Interest Rates

U.S. Construction Outlook

Changing Composition of Construction Spending

Growth Leader: ResidentialGrowth Leader: Residential Low Interest RatesLow Interest Rates

PublicPublic State Tax Revenues Hurt by State Tax Revenues Hurt by

Anemic Economic GrowthAnemic Economic Growth

Growth Laggard: NonresidentialGrowth Laggard: Nonresidential Weak EconomyWeak Economy

Growth Leader : NonresidentialGrowth Leader : Nonresidential Steady EconomySteady Economy

PublicPublic State Tax Revenues Recovery State Tax Revenues Recovery

Due to Economic GrowthDue to Economic Growth

Growth Laggard : ResidentialGrowth Laggard : Residential Rising Interest RatesRising Interest Rates

2001-2005 2006-2009Low Interest Rates

Weak Economy

Rising Interest Rates

Steady Economy

US Construction Markets Do Not Lose Momentum With Rising Mortgage Rates and Slowdown in Housing

Residential Construction

New Home Sales

0.70

0.90

1.10

1.30

1.50

MillionUnits

98 99 00 01 02 03 04 05 06

Existing Home Sales

+ 4.2% (2005)

Single-Family Housing Starts3 Month Moving Average

1.0

1.2

1.4

1.6

1.8

MillionUnits

98 99 00 01 02 03 04 05 06

Multi-Family has benefited from condo activity!

Seeking a Peak!

4

5

6

7

8

9Percent

00 01 02 03 04 05 06

Mortgage Rate

Tripping Rate = 6.5%

Year

2006 6.5%

2007 7.0%

Gradual & Modest Increases in Mortgage Rates Gradual & Modest Increases in Mortgage Rates Prevent a Bubble BurstPrevent a Bubble Burst

Inventory Draw RequiredHomes on Market/Monthly Selling Rate

Ten Year Average

Inventory Build Required

3.0

3.5

4.0

4.5

5.0

5.5

6.0

00 01 02 03 04 05 06

Ten Year Average

Inventory Build Required

New Home Order Cancellations on the Rise!

0.5

1.0

1.5

2.0

MillionUnits

98 99 00 01 02 03 04 05 06 07 08 09

Single Family Starts

Year

2005 1.71

2006 1.63

2007 1.52

Nonresidential Construction

100

130

160

190

220

Billions1996$

93 95 97 99 01 03 05 07 09

Nonresidential Construction

Year

2004 - 1%

2005 2%

2006 7%

2007 10%

Nonresidential Construction

20032003 20042004 20052005 2006 2007 2006 2007

LodgingLodging -10%-10% 8% 8% -4%-4% 6%6% 13%13%Health CareHealth Care -2%-2% -3%-3% 5% 5% 9%9% 4%4%ReligiousReligious -3%-3% -12%-12% -11%-11% -1%-1% 3%3%EducationalEducational -3%-3% -12%-12% -4%-4% 4%4% 9%9%

Public Construction

-80

-40

0

40

80$Billion

89 91 93 95 97 99 01 03 05

State & Local Government Surplus

Public Construction

20032003 20042004 20052005 2006 2007 2006 2007

BuildingsBuildings -3%-3% -4%-4% -2%-2% 4%4% 5%5%HighwayHighway -5%-5% -5%-5% 5% 5% 5%5% 5%5%SewerSewer 1% 1% -1% -1% 8% 8% 6%6% 4%4%WaterWater -1%-1% -8%-8% 6% 6% 8%8% 7%7%

Public Construction

120

140

160

180

200

220

Billions1996$

93 95 97 99 01 03 05 07 09

Year

2004 -5%

2005 2%

2006 4%

2007 5%

Maybe Recession Proof but Not Budget Proof

500

600

700

800

900

Billions1996$

93 95 97 99 01 03 05 07 09

U.S. Construction Outlook

Year

2004 3.2%

2005 3.3%

2006 1.3%

2007 1.2%

Overall construction Activity will not recedeOverall construction Activity will not recede

even in the face of rising interest rates and declining residentialeven in the face of rising interest rates and declining residential

Construction: Conclusions

Residential Easement ModestResidential Easement Modest Mortgage Rate Increases SubduedMortgage Rate Increases Subdued 6.5% Threshold Does Not Materialize Until 20066.5% Threshold Does Not Materialize Until 2006 Cement Intensity GainsCement Intensity Gains

Nonresidential RecoveryNonresidential Recovery Turning Points Already AchievedTurning Points Already Achieved Still Weak from a Historical PerspectiveStill Weak from a Historical Perspective Amplified by Intensity GainsAmplified by Intensity Gains Recovery within Sectors Differ Recovery within Sectors Differ

Retail/Hotel/Industrial LeadRetail/Hotel/Industrial Lead Institutional/Office LagInstitutional/Office Lag By End of 2006... All segments in GrowthBy End of 2006... All segments in Growth

Public Waiting In WingsPublic Waiting In Wings State Fiscal RecoveryState Fiscal Recovery Pent-up DemandPent-up Demand SAFETEASAFETEA

Cement Intensity

Favorable Relative Price ConditionsFavorable Relative Price Conditions Concrete prices relative to steel Concrete prices relative to steel Material substitution in designMaterial substitution in design

Cyclical RecoveryCyclical Recovery Larger, more cement intensive projects Larger, more cement intensive projects

typically associated with economic recoverytypically associated with economic recovery

Construction MixConstruction Mix Outlook favors nonresidential and public Outlook favors nonresidential and public

construction with typically higher cement construction with typically higher cement intensityintensity

Portland Cement Consumption

60

70

80

90

100

110

120

130

140

MillionMetric Tons

89 91 93 95 97 99 01 03 05 07 09

Year

2003 3.6%

2004 6.8%

2005 5.2%

2006 3.7%

2007 2.7%

2008 2.5%

2009 2.4%

Cement SupplyIn Perspective

Cement Supply Dynamics

92.291.5Clinker Capacity

21.3%22.3%Import Share %

23.924.1Total Imports

21.922.2Cement Imports

2.01.9Clinker Imports

88.686.1Domestic Shipments

112.3108.2Cement Consumption

20032002

93.4

22.8%

27.3

25.6

1.7

120.1

2004

90.2

No Shortage Tight Supplies

Pre-Katrina Cement Supply Survey

Spot Tight Supplies

No Shortage Tight Supplies

Current Cement Supply Survey

Spot Tight Supplies

Demand Pressures

Ratio of Cement Consumption to Construction

120

130

140

150

160

170

180

Thousand Tonsper $Billion

93 95 97 99 01 03 05 07 09

Residential Exposure

Residential Cement Consumption as % of Total State Cement Consumption

1 DELAWARE 43.0%

2 MAINE 42.4%

3 FLORIDA 42.1%

4 GEORGIA 40.8%

5 NEW HAMPSHIRE 35.6%

6 MARYLAND 35.1%

7 VIRGINIA 32.4%

8 ARIZONA 32.1%

9 TENNESSEE 30.3%

10 KENTUCKY 30.2%

NATIONAL 24.7%

Portland Cement Consumption

-20

-15

-10

-5

0

5

10

15

20

25

Year-Year% Change

02 03 04 05

Harsh Winter

Mild WinterMild Winter

Require Import Support

Cement and Clinker Imports (Thousand Metric Tons)

Country of Origin

5,753

2,808

3,215

2,123

1,729

27,305

2003 2004

+44%

+20%

-16%

+3%

-1%

+17%

5,601

3,344

2,228

1,766

1,745

23,241

-2%

+12%

-21%

+8%

+7%

-4%

Canada

Columbia

Korea

U.S. Total

China/Taiwan

Thailand

Mexico +62% (2004) +52% (2005)

+104%

-13%

+3%

-6%

+55%

+23%

2005

33,652

Import Composition2005 Increasers

0 100 200 300 400 500

Switzerland

Thailand

Indonesia

Norway

Middle East

Yugoslavia

Mexico

Peru/Ecuador

China/Taiwan

Greece

Korea

3,348

944

775

746

403

Tonnage Change (000)

Import Compositional Shift

5.3%3.8%Mexico

20.9%17.9%Latin America

19.7%20.6%Europe

21.1%24.1%Canada

29.5%33.3%Asia

20042003

3.6%0.3%Other

6.5%

17.6%

18.5%

16.1%

37.0%

2005

4.3%

U.S. Cement & Clinker Imports(Percent Change)

2005

Great Lakes

SouthAtlantic

District of Columbia

NewEngland

Middle Atlantic

13%

25%

17%43%

25%

2%

- 5%

3%

Florida

California

Northwest

Canadian Border

Gulf Coast

Mexican Border

41%

U.S. + 23.2%

48%

Cement and Clinker Imports

New Orleans

0

200

400

600

800

ThousandMetric Tons

04 05Katrina

Cement and Clinker Imports

0

10

20

30

40

50

MillionMetric Tons

89 91 93 95 97 99 01 03 05 07 09

Year

2003 23.2

2004 27.3

2005 33.6

2006 35.2

2007 35.7

2008 32.1

2009 32.5

And Flowed Despite

Constraints

Dry Bulk Carrier Fleet

Cement Carrier Fleet Worldwide: 260 @ 2.4 MMT (DWT) Average Age: 23

Cement Carriers over 15,000 DWT: 40

Average Age: 28Source: Belden Shipping

Worldwide

Fleet Size

5,800 Ships

Freight Rates

Europe

Asia

Freight Rate

$ Per Ton, to Gulf

0

20

40

60

01 02 03 04 05

Slack Markets

Easy Availability

Market Economics at Work

How Is The Industry

Responding?

Cement Inventories

2

4

6

8

10

MillionMetric Tons

93 95 97 99 01 03

Inventory Days

Industry Average: 20

2005e: 17

04

Blended Cement Consumption

0.5

1.0

1.5

2.0

2.5

MillionMetric Tons

98 99 00 01 02 03 04 05

Nov 2005 YTD 2.24 MMT

Blended Cement Consumption Wisconsin

MissouriWisconsin

0

5

10

15

20

ThousandMetric Tons

98 99 00 01 02 03 04 05 06

Nov 2005 YTD 60,000 MT

Announced Capacity Increases(Million Metric Tons)

-1

0

1

2

3

4

5

6

7

8

95 97 99 01 03 04 05 06 07 08 09

Net Expansion 2006-2009

16.1 MMT

$3.21 Billion

Industry Investment(1994-2004)

$7.4 Billion

Mexican Cement - No Silver Bullet

2005 2006 2007 2008

Portland Cement Consumption 120,693 125,138 128,512 131,709

Market Growth 3.7% 2.7% 2.5%

Total Mexican Imports 3,200 3,310 3,394

Hurricane Relief 200 200 200

Total Mexican Quota 3,000 3,110 3,194

California 150 156 160

Arizona 1,250 1,296 1,331

New Mexico/El Paso 725 752 772

Rest of Texas 215 223 229

Louisiana 280 290 298

Mississippi/Alabama 55 57 59

Florida 200 207 213

Rest of United States 125 130 133

Supply Conclusions

Domestic Supply Increases Face Limited GrowthDomestic Supply Increases Face Limited Growth Characterized by high operating ratesCharacterized by high operating rates Equipment stretched to their limitsEquipment stretched to their limits Persistently lean inventory positionPersistently lean inventory position Major expansion does not materialize until 2008Major expansion does not materialize until 2008 Murphy’s Law (Katrina!)Murphy’s Law (Katrina!)

Market Growth Dependent On ImportsMarket Growth Dependent On Imports Source AvailabilitySource Availability Ship AvailabilityShip Availability Freight RatesFreight Rates Truck/Rail/Waterway DisruptionsTruck/Rail/Waterway Disruptions Congested Ports & Terminal LimitationsCongested Ports & Terminal Limitations Cement not a favored commodityCement not a favored commodity

Supply Constrained MarketSupply Constrained Market No Near Term Relief from Current ConditionsNo Near Term Relief from Current Conditions

The Bottom Line

Economy’s Growth Rate Slows Economy’s Growth Rate Slows Foundations for Growth FirmFoundations for Growth Firm

EmploymentEmployment Consumer/Investment SlowdownConsumer/Investment Slowdown Threats to Scenario are Distant Threats to Scenario are Distant

Construction Sector Sustained GrowthConstruction Sector Sustained Growth Housing StrongHousing Strong Nonresidential Recovery Already UnderwayNonresidential Recovery Already Underway Public Turnaround NearPublic Turnaround Near

Cement Industry Conditions SustainedCement Industry Conditions Sustained Construction Growth Amplified By “Intensity” GainsConstruction Growth Amplified By “Intensity” Gains Plant Capacity Utilization Remains StretchedPlant Capacity Utilization Remains Stretched No Near Term Relief for Tight Inventory ConditionsNo Near Term Relief for Tight Inventory Conditions Imports Remain Key Supply Feed to MarketImports Remain Key Supply Feed to Market

Regional Perspective

Regional Portland Cement Consumption(Million Metric Tons)

2002 2003 2004 2005YTD

Wisconsin 2.05 2.23 2.33

% Change -11% 9% 4% 2%

Illinois 4.11 3.99 3.99

% Change -1% -3% 0% 4%

Indiana 2.08 2.18 2.24

% Change -8% 5% 3% -3%

Iowa 1.73 1.72 1.84

% Change 2% -1% 7% 8%

Michigan 0.08 0.13 0.23

% Change -12% -3% 4% -7%

Minnesota 0.06 0.09 0.14

% Change 1% 4% 0% -1%

U.S. -4% 4% 7% 6%6%

Real GSP - Wisconsin

0%

1%

2%

3%

4%

5%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Annual % Change

U.S.

Net Migration - Wisconsin

0

5

10

15

20

25

30

35

40

1991 1993 1995 1997 1999 2001 2003 2005

(000) Persons

Population Growth - Wisconsin

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1994 1996 1998 2000 2002 2004 2006 2008

Annual Growth Rate

U.S.

Single Family Permits - Wisconsin

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

# of units

Multi-Family Permits - Wisconsin

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

# of units

Key Markets Exposure - Wisconsin

Cement Consumption as % of Total State Cement Consumption

Residential: 29% Residential: 29% National: 30%National: 30%

Nonresidential: 17% Nonresidential: 17% National: 16%National: 16% Commercial: 14% Commercial: 14% National: 13%National: 13% Industrial: 1% Industrial: 1% National: 1%National: 1% Office: 2% Office: 2% National: 2%National: 2%

Public: 55% Public: 55% National: 46%National: 46% Highway: 40% Highway: 40% National: National:

32%32%

Cement per Capita U.S.: .368

Cement per Capita Wisconsin: .407

Clinker Capacity (000 Metric Tons)

19951995 20042004

WisconsinWisconsin 0 0 0 0IllinoisIllinois 2,544 2,544 2,770 2,770IowaIowa 2,409 2,409 2,672 2,672IndianaIndiana 2,610 2,610 3,191 3,191MichiganMichigan 4,877 4,877 4,243 4,243MinnesotaMinnesota 0 0 0 0

RegionRegion 12,44012,440 12,876 12,876 + 4%+ 4%

MMT YearRegional Expansions

Monarch – Humboldt, KS .330 ’06Eagle Materials – LaSalle, IL .430 ‘07Buzzi – Festus, MO .900 ’08Continental – Hannibal, MO .600 ’08

Holcim – St. Gen, MO 4.4 ‘08

Residential Cement ConsumptionWisconsin

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Metric Tons

Nonresidential Cement ConsumptionWisconsin

0

100,000

200,000

300,000

400,000

500,000

600,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Metric Tons

Public Cement Consumption Wisconsin

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Metric Tons SAFETEA-LU 2005-20093.56 $Bill (+30%)

Cement Outlook - Wisconsin

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Metric Tons

National & Regional Construction & Cement

Outlook

David E. Czechowski - Manager, Sr. Economist

Economic Research

Portland Cement Association

March 3, 2006

La Crosse, WI