Connect With Concrete Cement Outlook: 2009-2010 Ed Sullivan, Chief Economist PCA American Concrete Pipe Association

Connect With Concrete

Cement Outlook: 2009-2010Ed Sullivan, Chief Economist PCA

American Concrete Pipe Association


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.


Introduction: Stimulus

Stimulus SizeStimulus

EffectivenessStimulus Details

Stimulus Timing

Cement/Concrete Volume Estimates

Underlying Economic FundamentalsAnd…they are deteriorating at an alarming rate!


Underlying Economic Fundamentals


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JulyJuly20072007

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JanuaryJanuary20082008

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October October 20082008

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December December 20082008

States in Recession

Recession

At Risk

GrowingSource: PCA/BLS

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VTNH

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NJ


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

Connect With ConcreteEconomic Outlook: Five Factors

Sub-Prime

Defaults

Write-Downs

Risk Aversion

Tight Lending Standards

Commercial, Consumer, homeowner

capital access reduced

Global

FinancialCrisis

Mortgage Payments

Credit Cards

Defaults

Tight Lending Standards

Home Price Declines

Reliance on Home Equity

Gone

Structural Global Realities

Gasoline Prices

Heating Prices

Fertilizer/Biofuels hit Ag Prices

Supply Side Costs IngrainedCost of Business

Adds Weakness to Dollar

Energy/Inflation

State Deficits

Labor Markets

Slower Economic Growth

One Million Job Loss in 2008

Housing Recovery Delayed

Nonresidential Declines

State Fiscal Crisis Looming

Public Declines

Slower Job

Revenues Slow

Entitlement Programs Continue

Deficits

Drag on Recovery

Offsets Possible Federal Stimulus

Package


Sub-Prime

FinancialCrisis

Energy

Inflation

Labor Markets

2006 20082007 2009 2010

State Deficits

Economic Adversity

Connect With ConcreteNet Job Creation (Loss) - Annual Change, Thousand Net Jobs

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

1999 2001 2003 2005 2007 2009 2011 2013

Job Loss 2009 = 4.1 Million

Job Loss 2010 = 1.8 Million

Unemployment Peaks at +11% Early-2010


Annual Percent Change

Consumers feel the crunch…

Connect With ConcretePortland Cement Consumption Thousand Metric Tons

450

20,450

40,450

60,450

80,450

100,450

120,450

140,450

1998 2000 2002 2004 2006 2008 2010 2012

50 MMT

Connect With ConcreteCapacity Utilization RatesClinker Production/Clinker Capacity

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

2006 2007 2008 2009 2010 2011 2012 2013

Connect With ConcreteNo Stimulus Job Loss Estimates

Million Jobs

Obama Obama EconomistsEconomists

2008

2009-20102009-2010

PCAPCA


Point One Regardless of Stimulus’ Effectiveness, Laid Atop Weaker

Fundamentals


Point One

Regardless of Stimulus’ Effectiveness…it will be laid atop dramatically weaker fundamentals……

…Impacting volume estimates for 2009-2010


Stimulus Size: Expectations for Growth

Stimulus Not a Silver Bullet…and..the untold Story on Expectations

Connect With Concrete“Stimulus Timeline

Tax Cuts, Entitlement Spending, State Aid

Phase IStabilize

Economy, halt adverse momentum

2009 20112010

Phase II

Phase III

Shovel Ready

Projects

Long Term Investments

Policy Tool Objective

Job Saving Job Creating

Job Creation

Job Creation, Address

Structural Economic

Issues

Connect With ConcreteStimulus: GDP ImpactsChange in

GDP From No Stimulus Scenario Obama Obama

EconomistsEconomists

2009-20102009-2010

PCAPCA

GDP 4GDP 4thth Q 2010: Q 2010:

$12.2 Trillion$12.2 Trillion GDP 4GDP 4thth Q 2010: Q 2010:

$11.6 Trillion$11.6 Trillion

Note: Stimulus in PCA Outlook Overlaid upon Note: Stimulus in PCA Outlook Overlaid upon weaker Fundamentals.weaker Fundamentals.

Connect With ConcreteStimulus: Job Creation Estimates

Million Jobs Obama Obama EconomistsEconomists

2009-20102009-2010

PCAPCA

Unemployment: Unemployment: 7.0%7.0%

Unemployment: Unemployment: 8.8%8.8%

Job Estimates have large impacts on Job Estimates have large impacts on Cement/Concrete recovery assessments.Cement/Concrete recovery assessments.


Economic Growth OutlookPercent Change, GDP Growth Rate

Recession Scenario: No Stimulus

Recession Scenario: With

Stimulus


Point Two Expectations Vs Reality: More Stimulus May be Needed


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.


Phase One: Tax Cuts, Entitlements, State Aid

Expectations Vs Reality: More Stimulus May be Needed



Phase IStabilize


2009 20112010

Phase II

Phase III

Shovel Ready

Projects




Job Creation


Structural Economic

Issues

Connect With ConcretePhase 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

Connect With ConcretePhase 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 .

Connect With ConcretePhase 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.


Deficit % Share of Total Expenditures

2009 Fiscal Deficits

Source: PCA/Census

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No Deficit 0-10% 11%-15% 16% +


Surplus/Deficit Index, 2005=100

Fiscal Health – Sum of States

Surplus

Deficit


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.


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”


Phase Two: Shovel Ready Expectations Vs Reality: More Stimulus May be Needed



Phase IStabilize


2009 20112010

Phase II

Phase III

Shovel Ready

Projects




Job Creation


Structural Economic

Issues

Connect With Concrete“Shovel Ready” Timeline

House Bill

Senate Passes & Bill Signed

Obama Inaugurated

Federal Paperwork

State Paperwork

Jan MarchFeb April May

Bid Letting

June July August

Bid Review

Contractor Paperwork

Construction Begins

Job Creation May Job Creation May Come Later Than Come Later Than

Many ExpectMany Expect


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

Connect With ConcreteStimulus: Infrastructure Job Creation Estimates

Percent Job Premium Compared to A

Resurfacing

Reconstruction, Reconstruction, CapacityCapacity

Major WideningMajor Widening

Concrete Intensive Projects Create More Jobs Than ResurfacingConcrete Intensive Projects Create More Jobs Than Resurfacing

New RouteNew Route

Bridge Bridge ReplacementReplacement

New BridgeNew Bridge


Point Three Significant Relief for Construction does not Materialize in

2009


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.


Phase Three: “Hard” Infrastructure Expectations Vs Reality: More Stimulus May be Needed



Phase IStabilize


2009 20112010

Phase II

Phase III

Shovel Ready

Projects




Job Creation


Structural Economic

Issues


Economic Growth OutlookPercent Change, GDP Growth Rate

Recession Scenario: No Stimulus

Recession Scenario: With

Stimulus


Adding it Up


Spending DetailsMillions of $


Stimulus Scenario – Cement Demand2009 2010 2011

Fall Forecast 85,485 83,327 91,507Annual Change -11.6% -2.5% 9.8%

No Stimulus 76,950 70,025 76,327Annual Change -19.0% -9.0% +9.0%

Direct Tons 5,004 16,972 6,641Indirect Tons 500 3,394 13,281Total Added Demand 5,504 20,366 19,922

Total Market (With Stimulus) 82,454 90,391 96,248Annual Change -13.2% +9.6% +6.5%


Total Added Cement Consumption – U.S. 000 Metric Tons

Source: PCA

Infrastructure Investment

Aid-to-States Indirect

Connect With Concrete Percent Increase In Consumption Compared to No Stimulus


Stimulus: State ImpactsAdded Cement Demand: 2009-2011

Source: PCA

Rank(000) MT Share of Total

(%)1 California 6,080 13.42 Texas 4,860 10.73 Florida 3,266 7.24 Ohio 1,744 3.85 Illinois 1,718 3.86 Pennsylvania 1,664 3.77 Georgia 1,600 3.58 New York 1,523 3.49 Arizona 1,271 2.8

10 Virginia 1,097 2.411 North Carolina 1,052 2.312 Indiana 923 2.013 Missouri 919 2.014 Wisconsin 905 2.015 Louisiana 889 2.0

Connect With ConcretePortland Cement Consumption Thousand Metric Tons

450

20,450

40,450

60,450

80,450

100,450

120,450

140,450

1998 2000 2002 2004 2006 2008 2010 2012


Point Four


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.


Implications Market Imbalances


Capacity ExpansionThousand Metric Tons

0

2,000

4,000

6,000

8,000

10,000

2006 2007 2008 2009 2010 2011 2012

Stated Capacity Expansions Potential Increases

From Specification Changes

Connect With ConcreteMarket Imbalances - Changes in Cement Consumption Tons + Capacity Expansion Tons

1974

1981

1991

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2007

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-10,000,000

-5,000,000

0

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10,000,000

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25,000,000

1970 1980 1990 2000 20101973-74

1980-82 1990-91 2000-01 2007-2010


Import VolumeThousand Metric Tons

Connect With ConcreteCapacity Adjustments *Thousand Metric Tons

Capacity Adjustments Due to Delayed Expansions and Plant Closures

* Adjustments Include Five Delays in Plant Commissioning and Eleven Plant Closures

Connect With ConcreteCapacity Utilization RatesClinker Production/Clinker Capacity

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

2006 2007 2008 2009 2010 2011 2012 2013


Point Five Industry Hardship Eases, But Not Avoided with Stimulus


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.


Beyond the CrisisStimulus Payback in context of Global Recovery


Introduction: Overview

Cyclical correction is temporary.


Point Six Spending Payback: Softer Economic Growth


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).

…But even with these gains…past cyclical peaks are not expected to materialize until 2015.


The Economic Recovery

Sub-Prime Drag Abates

Stimulus Gains Employment Traction

Bank Lending Aversion Improves

Lending Risk Declines: Credit Easing

Energy Stimulus

20092008 2010 2011

State Deficits Improve

Pent-Up Demand Released


000 Starts

Single Family Housing– United States

Pent-Up Demand

Interest Rates low, Decline in Home Price, Job Recovery Translate into

Improved AffordabilityExcess Inventories

Worked Off

Connect With ConcreteNonresidential Long Term TrendMillion Real $, 1996

Connect With ConcreteCurrent: Gasoline Prices Vs Asphalt Prices Per Barrel Price Per Barrel

0

20

40

60

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120

FY1990 FY1996 FY2002 FY2008

1990-2003: Average Differential = $15

Connect With ConcreteGasoline - Asphalt Margin Per Barrel Differential - Net Threshold of $14 Per BarrelPrice Differential Per Barrel

Threshold Differential = $14 per barrel Estimated on a Ten Year Payoff for Coker Investment

Connect With ConcreteAnnounced New Coker InstallationsCumulative: Thousands of Barrels Per Day


Liquid Asphalt SupplyThousands of Barrels

44 Million Barrel Decline by 2011

Connect With ConcreteProjected:Initial Bid Concrete Vs Asphalt Paving CostsPer Two Lane Road Mile - Urban

Concrete

Asphalt

Parity Achieved in Fiscal 2009

Connect With ConcreteProjected:Life Cycle Concrete Vs Asphalt Paving CostsPer Two Lane Road Mile - Urban

Concrete

Asphalt

Concrete Advantages Materialize in Fiscal 2009


Point Seven A “V” Shaped Construction Recovery?


Point Seven Once recovery is in place….

And despite payback costs for stimulus…

Concrete construction could record large and sustained gains in growth.


Cement Outlook: 2009-2010Ed Sullivan, Chief Economist PCA

American Concrete Pipe Association

Documents

Connect With Concrete Cement Outlook: 2009-2010 Ed Sullivan, Chief Economist PCA American Concrete Pipe Association