NESMEA Workshop Newark, DE Edward J. Sullivan Staff Vice President and PCA Chief Economist

Transcription

1 Cement Outlook: 2007 NESMEA Workshop Newark, DE Edward J. Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve

2 Introduction

3 Construction Market In Transition Slowing Economic Growth Rising Inflation, Higher Interest Rates, High Energy Prices Construction Market Flattening Harsher Decline in Residential Slower Nonresidential & Public Recoveries Higher Material Costs Potential for Market Contraction in 2007 Cement Supply Slow to Adjust to Slower Growth Environment Imports May Smash Last Year s Record If unchecked, could create a 6 MMT overhang by year-end. end. Tight Market Conditions Dramatically Reduced Add Extra Dose of Conservatism to Forward Plans Particularly true for states where total cement consumption is highly h dependent on housing. Prepare Contingency Plans Incorporating Downside Risks.

4 Key Points of Analysis U.S. Economic Outlook: Residential Construction Outlook Nonresidential Public Demand Operating Conditions Cement Outlook

5 U.S. Economic Outlook

6 Slower Economic Growth Ahead Higher Oil Prices Inflation Runs Stronger Interest Rates Rise Faster Slower Net Job Creation Consumption Growth Slows Accounts for $2 out of every $3 total economy generates.

7 Energy Outlook

8 Slower Economic Growth: Oil Price Outlook Strong International Demand Japan s Economic Recovery Stronger Asian Demand: China & India Supply Disruptions Continue Middle East Uncertainties, Nigeria, Venezuela Iran & Uranium Enrichment Structurally Weaker Dollar Higher Energy Prices $80 $70 $60 $50 $40 $ Per Barrel, West Texas Intermediate Projected 2006: $68.87 per barrel WTI 2007: $65.22 Impact: Higher oil prices raises inflation, inflationary expectations, trims growth in consumption and overall economic activity. $30 $20 $

9 Slower Economic Growth: Gasoline Price Impact Gasoline Prices Top $3 Seasonal patterns suggest September peak. Gasoline Purchases To Account for 5.3% of Total Consumption. 2005: 4.2%, 2004: 3.6%, 2003: 3.3% Steals $125 Billion from Consumer Spending Compared to 2005 Rising gasoline prices stole $75 Billion in 2005 and $50 Billion in 2003 $2,500 $2,000 $1,500 $1,000 $500 $1,154 Estimated Annual Gasoline Spending Per Vehicle $1,360 $1,669 $2,169 $2,124 Impact: Going forward, consumer spending growth reduced slower economic growth. $

10 Slower Economic Growth: Heating Oil Impact Peak Heating Season Begins In November Seasonal patterns suggest move to more than $3.10 per gallon. $2,500 $2,000 Estimated Seasonal Home Heating Costs Per Home $1,857 $2,323 Nearly $500 Increase Over High 2005 Levels. $1200 increase over normal 2004 levels impacts minimized by mild winter conditions. $1,500 $1,000 $1,087 $1,108 $1,469 Assumes Average Winter. Adverse impact increases with severity of winter. $500 Going forward, consumer spending growth reduced slower economic growth. $ % of Total Heating Bills Occur Nov - March

11 Inflation Outlook

12 Slower Economic Growth: Inflation Outlook Annual Percent Change, CPI Urban Higher Energy Prices Structure 5.0% Still Cyclical but Projected Stronger Asian Demand: China & India Labor Costs Rising Unemployment Rates Decline below 5% Workers Cautious in Pushing for Increases Productivity Growth Easing? Structurally Weaker Dollar Trade Deficit Widens Structurally Higher Transportation Costs Energy & Logistical bottlenecks 2006: 3.6% 2007: 2.9% Impact: Higher prices undermine consumer affordability & raise long term interest rates (mortgages) 4.0% 3.0% 2.0% 1.0% 0.0%

13 Interest Rate Outlook

14 Inflationary Expectations 18 Month Moving Average, CPIU 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Basis Point Increase Since Mid When Fully Digested Implies 7%+ Mortgage Rate

15 Federal Reserve Policy Actions Overall Economy & Job Growth Slowing. Inflation a growing concern. Fed Policy: Reaction to potential future inflationary threats not current CPI. Dilemma: Inflation or Growth? Fed Fights Inflation! One more rate hike anticipated during 2006/early Federal Funds to 5.5% Risk of Fed over-reaction. reaction Federal Funds Interest Rate, Annual Percentage Rate Projected

16 Total Public U.S. Debt. Approaching $10 Trillion Total Public Debt, Million $ 12,000,000 10,000,000 CBO Estimate: Debt Increases $1.1 Trillion by ,000,000 6,000,000 4,000,000 2,000, Government Relief & Rebuilding Efforts Exceed $250 Billion

17 Net Foreign Purchases: US Bonds & Notes $ Millions Mortgage Rate M1 2004M1 2005M1 2006M1 5.0 China May Diversify its Portfolio Away from U.S.

18 Interest Rate Conclusions: Higher Inflation Premiums Add to Real Rates Federal Reserve Pursues Tighter Monetary Policy Federal Reserve Pursues Tighter Monetary Policy New Fed Chairman demonstrates resolve Favors Inflation Targeting (2%) Larger Public Demand for Funds Middle East New Orleans Private Demand for Funds Increase Foreign Supply Slows Weak Dollar lower foreign returns Competing Investment Instruments

19 Employment Outlook

20 Slower Economic Growth: Labor Market Outlook Job growth slowing from 1 st Quarter average of 176,000 net new jobs per month to 2 nd Quarter averaging 110,000 net new jobs per month. 2006: 1.7 million 2007: 1.6 million net new jobs creation Job creation: Estimated at 4.7 million jobs , 2008, compared to 6.1 million in Spring forecast Monthly Net Job Creation, Payroll Survey Projected Unemployment rises to 4.8% year end. 2007: 5.2% Slow down in trend of accelerating wages by Impact: Slower consumer spending & Federal Reserve increasingly more cautious approach toward future rate hikes

21 Economic Outlook

22 Snap Shot of Economic Activity Government 18% Investment 15% Consumer 69% Consumption acts as the anchor for US economic activity. Any retrenchment in consumer spending will lead to slower economy-wide growth rates

23 Slower Economic Growth: Consumer Spending Consumer Spending Outlook Consumer spending accounts for more than 2 out of every 3 dollars created by 5.0% U.S. economy. 4.5% Slower Job & income growth implies slower growth in consumer spending. 4.0% Higher Oil prices, inflation and rising interest rates dampen improvement in 3.5% sentiment. Affordability erodes, but high from historical perspective. Less home refinancing activity & growth in mortgage ARMs dampen Slower Automotive Spending Consumer Spending Grows below 3.0% next two years. Downside risk. 3.0% 2.5% 2.0% 1.5%

24 Slower Economic Growth: Investment Spending Near term outlook remains positive but less so than six months ago. 20.0% Nonresidential Fixed Investment, Annual Percent Change Fixed, Non-residential investment has recorded strong growth during last two years. Economic growth improves expected return on investment. Funds availability Internal Funds: Profitability External Funds: Favorable rate environment Risk premiums reduced Small borrowers easier credit terms and conditions. Going Forward: Slower economic growth, higher costs reduce expected ROI. Slower profit environment adds extra does of caution in spending for investment. 15.0% 10.0% 5.0% 0.0% -5.0% -10.0%

25 Net Exports: Rising Trade Deficit Real Chained $ M1 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1 Higher Price of Oil Imports Worsens Trade Deficit

26 Value of U.S. $: Sustained Weakness Percent Change, Broad Index 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% 1998M1 1999M1 2000M1 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1

27 Economic Outlook : Real GDP Growth Real GDP Annual Growth Rate 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% 2005: 3.5% 2006: 3.3% 2007: 2.8% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q : 2.6% Risks On Downside: 2 nd Half 2007 and Beyond Recent Government Data Puts 2 nd Quarter GDP at 2.9%...PCA Projected 2.8%. Forecast Remains on Track

28 Construction & Cement Outlook Overview

29 Total Construction Billion 1996 $ : 4.4% Growth 2006: YTD: 2.6% Growth

30 Changing Composition of Construction Spending Low Interest Rates, Weak Economy Rising Interest Rates, Strong Economy Growth Leader: Residential Low Interest Rates Public State Tax Revenues Hurt by Anemic Economic Growth Growth Laggard: Nonresidential Weak Economy Growth Leader : Nonresidential Strong Economy Public State Tax Revenues Recovery Due to Strong Economic Growth Growth Laggard : Residential Rising Interest Rates

31 Cement Intensities

32 Composition Of Cement Growth: Construction Activity Vs Cement Intensity Growth Annual Percent Change, Real Put-In-Place Construction & Cement Intensity 8% 7% 6% 5% 4% Construction Activity Growth Construction Activity Growth 3% 2% 1% Cement Intensity Growth Cement Intensity Growth Cement Intensity Growth 0%

33 Composition Of Intensity Growth Preliminary Estimates* Changes In Construction 15 Composition Changes In Regional Composition Changes In Relative Prices Changes in SCM/Other *Based on Forthcoming PCA Economics Report

34 Cement Intensity Outlook Competitive price position Vs other building materials Composition of construction Nonresidential intensities are cyclical Code changes: hurricane Green environment Product SCM s steal some intensity growth Fiscal healing: local roads higher portion of construction $ 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Annual Growth Metric Tons Per Real Construction $ Projected Five Year Average

35 Residential Construction Single Family

36 Strength in Starts More Than Low Rates The Cyclical Upside: Low mortgage rates key factor in single family starts over past few years. Emergence of exotic mortgages also a key factor particularly in strong home appreciation environment. Easy credit conditions contributed to strong home-buying environment. Speculators add froth to market in light of strong appreciation rates. The Cyclical Downside: Mortgage rates rising. Exotic mortgages losing favor. Defaults and delinquencies cause a deterioration in credit quality and a tightening of credit conditions Speculators reduced/disappear in lower appreciation rate environment

37 Mortgage Rate History: 30 Year Conventional Annual Growth Rate, 30 Year Conventional Peak to Trough 294 Basis Point Decline Last 12 Months Reflect a 108 Basis Point Increase

38 Mortgage Rate History: 1 Year Adjustable Rate Annual Growth Rate, 1 Year ARM Peak to Trough 387 Basis Point Decline Trough to Peak Reflect a 230 Basis Point Increase

39 Mortgage Rate Outlook Annual 30 Year Convention Rate Higher inflation premiums Federal Reserve pursues tighter monetary policy Larger public demand for funds Private demand for funds increase Foreign supply slows 2006 Year End: 7.1% 2007 Year End: 7.5% Note: 2005: 5.87% Well past 6.5% Tripping Rate for Starts Decline. Projected

40 Growing Home Price & Income Gap Annual Growth Rate Comparison 16.0% 14.0% Home Prices 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Household Income

41 Emergence of Exotic Mortgages Interest Only Loan Share of Sub-Prime Market 35.0% 30.0% 25.0% Share by Loan Count: Striped Yellow 20.0% Share by Principle Balance: Solid Green 15.0% 10.0% 5.0% 0.0% Note: Sub-Prime accounts for 36% total mortgage market

42 Sub-Prime Mortgage Resets Total Loans Scheduled for Reset 50,000 45,000 40,000 35,000 30,000 25,000 20,000 Period of Emerging Trouble 15,000 10,000 5,

43 Structure of Borrowing: Credit Tightening? Ratio of Home Prices to Income Strong Appreciation Rates Monthly Mortgage Payment to Income Ratio Threatens Housing Expansion Fewer Qualify, Home Sales decline Increase in Alternative Financing Sub-Prime, 75% Adjustable Exotic Mortgages Amplified by Aggressive Appraisals Higher Risk In Rising Interest Rate Environment Alternatives Re-Adjusted to Prevailing Rates Mortgage Shock Consumer spending habits slow to change Increase in delinquencies & defaults Credit Tightening On Horizon? Ingredients in place At Issue: Timing, Magnitude Year Average

44 Inventory Draw Required Homes on Market/Monthly Selling Rate Inventory Draw Required Ten Year Average Highest Level Since Inventory Build Required

45 SF Inventory Adjustment Outlook (000) Units Average Years of Inventory Build Conditions Disappear

46 Single Family Housing Starts (000) Units 2,000 1,800 1,600 1,400 1,200 1, Growing Downside Risks Mortgage Bankers Association National Association of Realtors NAHB

47 Nonresidential Construction Overview

48 Nonresidential Construction Annual Growth Rate 20.0% +9.2% 2006 First Half 7.6% Projected % 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/ M1

49 Nonresidential Outlook Non-residential turned in 2005 after 4 years of decline. Underlying nonresidential drivers improving. Impatient: Improvement slower than expected Story Correct Timing Despite large percentage gains for 2006, most markets weak from historical perspective. Past cyclical peak not realized. Slower growth outlook depresses expected ROI and tempers recovery. Increasing cement intensities reinforce construction activity gains Billion Dollars, Real 1996 $ Projected

50 Industrial Outlook Sustained economic growth. Weak dollar. Utilization rates top 80%. Improved corporate profitability Billion Dollars, Real 1996 $ Projected Improvement in expected ROI leads to accelerated construction. 20 Healing process already two years in progress. Big Three retreat partially offset by transplant expansion. Regional impacts arising from automotive widely different

51 Lodging Outlook Business Travel Improves: Reflecting economic growth & strong profits & looser travel budgets Vacation Travel Improves Reflecting employment gains, wage gains and weak dollar Hotel demand growth averages 4%- 6% annually Occupancy rates improve Average room rate increases with revenues growing at 8% Clip Improvement in ROI s eventually lead to accelerated supply expansion Another year of burn-off likely before more significant gains materialize Billion Dollars, Real 1996 $ Projected

52 Office Building Outlook Office employment grows at 3% annual rate. Vacancy rates improve 200 basis points in 2006 & Leasing rates firm. Improvement in expected ROI leads to accelerated office construction. Healing process already two years in progress. Gradual recovery anticipated in 2006 and beyond Billion Dollars, Real 1996 $ Projected

53 Health Construction Outlook Billion Dollars, Real 1996 $ Recent double-digit digit growth not an illusion Projected Baby Boomers are aging adding demand Demand increases have been offset by HMO reductions in length of hospital stay. Insurance requirements reducing hospital stay have played out. Increase in-patient patient per bed suggests new investment/expansion. Supplemented by outpatient construction & nursing homes

54 Oil Well Outlook Run-up up in oil prices results in: Oil Prices (Bar-Right), Oil Rig Count (Line Left) 80 Projected 3000 in 50% increase in rig count % increase in sector cement consumption Oil Prices remain high and decline slowly Cement consumption mirrors trend in oil prices

55 Public Construction

56 Public Construction Outlook: Importance of Sector Public Public Public Share of Total Construction Public Share of Total Cement 24% 50%

57 Public Construction Outlook: State & Local Share of Public Construction Percent of Total Public Construction Spending 93% 91% 89% 87% 85%

58 Public Construction Outlook 93% of public construction performed at state/local level. State/Local fiscal problems fading. Revenue growth improves with economy and job growth. Surpluses will re-emerge. emerge. Pent-up demand released. Highway Bill adds strength. 2006: +4.8% 2007: +5.5% Billion $ State Surplus/Deficit, NIPA Note: 2005: +1.9% Q1 1991Q1 2003Q1

59 Public Construction Outlook: State Deficit Estimates Fiscal Year 2004 Pacific $38 $.11 Primary Source: Newsweek July 28, 2003 $.85 $1.0 Secondary Sources: Nat l Conf. of State Leg., Center on Budget and Policy Priorities, Nat l Assn. of State Budget Officers, Calif. Budget Project $.36 $.16 $1.5 Mountain $.08 $.12 $0 $0 $.4 $.98 West South Central West North Central $0 $.05 $.38 $3.7 $.3 $2.4 $.41 $1.0 $.22 $.6 $2.0 $3.6 $.09 $1.3 $.75 $.2 $.5 East South Central Deficit as percentage of budget East North Central $1.7 $.2 $.74 $2.4 $2.0 $.4 $2.0 $9.3 $.25 $1.1 VT $.03 District of Columbia South Atlantic New England $.49 Middle Atlantic $.14 NH $.15 MA$3.0 RI $.17 CT $1.9 NJ $4.6 DE $.2 MD $.85 KEY Dollar figures, in billions, indicate amount states had to save to balance 2004 budget. 0-9% 10-19% 20-29% 30-39%

60 Public Construction Outlook: State Deficit Estimates Fiscal Year 2005 Pacific $0 $15 $0 Primary Source: Center on Budget Policy and Priorities Feb / 04 Secondary Source: National Association of Budget Officers $0 $0 $1.1 Mountain $0 $0 $0 $0 $0 $.3 West South Central West North Central $0 $.17 $.21 $0 $.6 $.3 $.19 $.34 $.9 $.5 $.0 East South Central Deficit as percentage of budget $0 $2 $.71 $.9 $.6 $0 $.62 East North Central $.2 $0 $.9 $0 $.12 $.5 $5.1 $.93 $.8 $0 VT $0 District of Columbia South Atlantic New England $.17 Middle Atlantic $.14 NH $0 MA $1.5 RI $.19 CT $.2 NJ $5 DE $0 MD $.74 KEY Dollar figures, in billions, indicate amount states had to save to balance 2005 budget. No available data 0-9% 10-19% 20-29% 30-39%

61 Market Conditions

62 Portland Cement Outlook Annual Percent Change Growth Rate Yellow Line Million Metric Tons Volume, Green Bar 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 160, , , ,000 80,000 60,000 40,000 20, %

63 Supply

64 Cement Supply Survey Summer 2005 No Shortage Tight Supplies Spot Tight Supplies

65 Cement Supply Survey Summer 2006 No Shortage Tight Supplies Spot Tight Supplies

66 Cement Capacity Outlook Thousand Metric Tons Clinker $4.8 Billion Committed to Expansion

67 United States Cement Domestic Production Outlook (Thousand Metric Tons) Clinker Capacity Expansion Operating Rate Clinker Production Cement Potential (1) , % 81,518 85, , % 81,658 85, ,925 1, % 86,786 91, , % 87,256 91, , % 88,552 92, ,591 1, % 89,760 94, ,781 8, % 97, , ,781 9, % 103, , ,504 2, % 105, ,364

68 Import Volume & Freight Rates Freight $ Per Ton, Handymax, Asia-Gulf Import Volume, Million Metric Tons $60 $50 $ YTD: 42.4 MMT 50,000,000 40,000,000 $30 30,000,000 $20 $ : 33.6 MMT 20,000,000 $0 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/ ,000,000

69 Inventory : Days Supply Inventory/Daily Selling Rate Average:

70 Market Balances: Baseline Adjusted Supply Vs Consumption Green: Domestic Yellow: Imports Inventory Adjustment Green: Inventory 25 Red: Day Supply

71 Market Balances: Trend Adjusted Supply Vs Consumption Green: Domestic Yellow: Imports ,000 6,000 4,000 2,000 Inventory Adjustment Green: Inventory 25 Red: Day Supply ,000-4, ,

72 Conclusions

73 Conclusions Slower Economic Growth Ahead Harsher Decline in Residential Construction Slower Nonresidential Recovery Less Robust State Fiscal Outlook Hinders Rate of Growth in Public Sector Slower Growth in Cement Consumption Imports May Smash Last Year s Record Tight Market Conditions Dramatically Reduced Timing of Economic Risks Coincide With Capacity Expansion (2008)

74 Risks: Threat to Growth One in five chance of occurrence. Beginning in late : 2008: Mortgage rates rise rapidly and achieve higher levels. Residential declines significantly. Consumer spending growth moderates. 150, , ,000 75,000 Total Cement Consumption, Thousand Metric Tons Job market flattens, declines. 50,000 Nonresidential flattens. Public looses momentum as tax receipts ebb. Risk: 75 Million Ton Correction ( ) 2010) 25, Timing coincides with industry expansion.

75 Cement Outlook: 2007 NESMEA Workshop Newark, DE Edward J. Sullivan Staff Vice President and PCA Chief Economist For the Second Straight Year Awarded Most Accurate Forecaster (GDP) by the Chicago Federal Reserve