Cement Outlook Ed Sullivan, SVP & Chief Economist December 2017 I Brooklyn Center, Minnesota
Overview a
Misery Index Unemployment + Inflation+ Interest Rate 40 35 30 25 20 15 10 5 0 Jan 1972 Jan 1977 Jan 1982 Jan 1987 Jan 1992 Jan 1997 Jan 2002 Jan 2007 Jan 2012 Jan 2017
Labor Markets Net Job Creation Monthly Gain 500 7.0% Unemployment Rate U3 Measurement 400 6.5% 300 6.0% 200 5.5% 100 5.0% -100 0 2014 2014 2015 2015 2015 2016 2017 2017 4.5% 4.0% 2014 2014 2015 2015 2015 2016 2017 2017
Interest Rates Interest Rates Annual % 6.04 5.04 4.04 3.04 8.0% 6.0% 4.0% 2.0% 0.0% Inflation Rate CPUI, Annual % Change 2.04 1.04 BAA Bond Rate Conventional Mortgage Rate -2.0% -4.0% -6.0% 0.04 2014 2015 2015 2017-8.0% 2014 2014 2015 2015 2015 2016 2017
Residential a
Affordability Conditions Mortgage Rate Conventional Fixed 5.0 New Home Price Change Annual % Change 6% 4.5 4% 4.0 2% 3.5 0% 3.0-2% 2.5-4% 2.0 2014 2014 2015 2015 2015 2016 2017-6% 2014 2014 2015 2015 2015 2016 2017
Affordability Conditions Monthly Payment Average New Home 1,500 New Home Price Premium % of Existing Home Price 135% 1,400 130% 1,300 125% 1,200 120% 1,100 115% 1,000 110% 900 105% 800 2014 2014 2015 2015 2015 2016 2017 100% 2014 2014 2015 2015 2015 2016 2017
1,000 Housing Starts Single Family SAAR 900 800 700 600 Multifamily SAAR 550 500 450 400 350 300 Mortgage to Rent Ratio: 2005: 2.1 2010: 1.3 2015: 1.0 2017: 1.0 500 2005: 1,719 thousand 2017: 840 thousand - 48.4% of past peak 400 2014 2014 2015 2015 2015 2016 2017 250 200 2014 2014 2015 2015 2015 2016 2017
Nonresidential a
Nonresidential Construction 25% 16.4% 20% 15% 11.0% 10% 8.6% 5% 1.2% 0% 2014 2015 2015 2017-5% -10%
Separation Between GDP & Construction Spending Growth a
Labor Markets Real GDP Growth Rate Quarterly 6.00% 5.00% 4.00% 3.00% 2.00% Real Construction Growth Rate Monthly 14.0% 12.0% 10.0% 8.0% 6.0% 1.00% 0.00% -1.00% -2.00% 2014 2015 2017 4.0% 2.0% 0.0% 2014 2014 2015 2015 2015 2016 2017 2017-2.0% -4.0%
Construction Markets Private Sector Construction Growth Monthly 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2014 2015 2017 2015 2015 2016 2017 2017 Public Sector Construction Growth Monthly 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% These trends are expected to continue and under minds the growth trend. -10.0% 2014 2014 2015 2015 2015 2016 2017 2017
a States Feel Financial Strain Number of States Enacting Budget Cuts Following Budget Approval 50 45 40 35 30 25 20 15 10 5 0 20 28 35 22 9 8 13 7 2 3 1 16 37 37 18 5 2 4 13 41 39 19 Recent rise in budget cuts prior to a recession is not consistent with historical patterns 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 8 11 8 14 19 23 Source: NASBO
a States Feel Financial Strain Governor's budgets for fiscal 2018 display significant degree of caution as states contend with slow revenue growth and increasing spending pressures coupled with federal uncertainty. Proposed 2018 budgets would increase 1.0 percent in fiscal 2018 the smallest spending increase since fiscal 2010 when states were in the depths of the Great Recession. Many states are also contending with limited budget flexibility, as spending requirement in less discretionary areas such as pension obligations and health care costs continue to rise faster than inflation and state revenues. Source: NASBO
Public Capital Investment Share of GDP 3.0% 2.5% State & Local capital investment in as a share of GDP has declined to a post WWII low State & Local 2.0% 1.5% Federal 1.0% 0.5% Capital investment based on structures, i.e. schools & roads. Excludes equipments & software 0.0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: BEA, PCA 17
Medicaid Growth vs State Revenues State & Local Governments 1965=100
Cement Consumption Performance Thousand Metric Tons 105,000 100,000 Jan Aug Average 93.8 SAAR 95,000 90,000 85,000 80,000 2016 2017 2.23% 75,000 Jan Feb March April May June July August Sept Oct Nov Dec
Current Trends In the Context of Hurricanes & Fires a
Cement Consumption Performance Thousand Metric Tons 105,000 100,000 Displacement Recoup 95,000 90,000 85,000 2016 80,000 2017 75,000 Jan Feb March April May June July August Sept Oct Nov Dec
Cement Consumption Performance Thousand Metric Tons 105,000 100,000 September Dues Actuals Versus Texas and Florida Trends = -419K Metric tons 95,000 90,000 85,000 80,000 2016 2017 92.6 SAAR vs the 88.2 SAAR Actual 75,000 Jan Feb March April May June July August Sept Oct Nov Dec
Stage II: Trump Policy Initiatives Take Hold a
a Fall Forecast: Trump Policies Tax Reform (L 1, 2019) Infrastructure Investment (L 2, 2019) Immigration Reform (EO) Building the Wall (L 1, 2018)
Political Environment & Impact on Forecast Thousand Metric Tons Trump Trump Trump Trump Face Lite Impasse Weighted Growth Face Lite Impasse Weighted Growth 20% 60% 20% Estimate Rate 5% 65% 30% Estimate Rate 2016 18,396 55,189 18,396 91,982 4,599 59,788 27,595 91,982 2017 18,967 56,900 18,967 94,833 3.1% 4,742 61,642 28,450 94,833 3.1% 2018 19,801 59,176 19,649 98,627 4.0% 4,950 64,107 29,474 98,532 3.9% 2019 21,445 62,727 20,357 104,528 6.0% 5,361 67,954 30,535 103,850 5.4% 2020 22,731 63,668 21,069 107,468 2.8% 5,683 68,973 31,604 106,260 2.3% 2021 21,527 64,304 21,807 107,638 0.2% 5,382 69,663 32,710 107,755 1.4%
Stage II: Tax Reform a
a Trump Tax Policies Impact on Cement Consumption Uncertainty prevails surrounding details of tax initiative. Economic impacts, a result, contain risk. PCA has reduced the tax impact s contribution to cement consumption. Stronger Economic Growth Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to growth initially in Q1 2020, and increases to 80 BP by Q4 of 2021. Construction Spending Accounts for Roughly 6% of GDP Apply General Cement Intensity Citizen Justice Tax Foundation Tax Policy Center Cement Consumption Increases
a Federal Debt Billion Nominal Dollars 25,060 Federal Debt is now at nearly $20 trillion. Since the Budget Control Act of 2011, the debt increased 31.2%. 20,060 15,060 Even 10,060 taking into consideration the potential revenue gains associated with stronger economic activity tax 5,060 reform may not be neutral and sets the stage for discussion of infrastructure 60 spending. 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Stage II: Trump Infrastructure Initiatives a
a Spring: Infrastructure Timing: Nothing Soon Based on PCA D.C. assessment may be delayed one year. One Month Six Months One Year Eighteen Months House & Senate Passage 1-9 Months Federal & State Paperwork 4-12 Months Bid Letting & Review 6-15 Months Contract Award to Construction 11-22 Months Average Construction Start: 15 Months or Mid-2019 30
Infrastructure Size of Program Billion $, Stated As Five Year Spending $1,200 With the push-back in the timing of the infrastructure $1,000 bill to 2019 to coincide with tax reform measures federal debt issues take center stage $800 and reduce the size of the infrastructure program to Clinton program of $275 billion, or $55 billion annually. $600 $400 $200 $0 Sanders Clinton Clinton Doubled Vague Suggestion Average Clinton - PCA Assumption Vague
Trump Infrastructure :Time Distribution Spending Allocation Calendar Years Billion $ Billion $ 2017 2018 2019 2020 2021 2022 2017 --- --- --- --- --- --- --- 2018 --- --- --- --- --- --- --- 2019 $27.50 --- --- 2020 $55.00 --- --- $2.89 $17.60 $17.88 $9.90 2021 $55.00 --- --- --- $5.78 $17.60 $17.88 2022 $55.00 --- --- --- --- $5.78 $17.60 Occurs during the forecast horizon. Total $192.50 --- --- $2.89 $23.38 $41.25 $45.38 Progam $275.00 % 70.0%
a S&L Sterilization Changes in Spending, Mil $ $8,000 $6,000 $4,000 $2,000 $0 Sterilization: 31% Sterilization: 88% -$2,000 State -$4,000 & Local Sterilization -$6,000 -$8,000 Assumption 20% Phased In by 2021 TEA/SAFETY-LU Fed + ARRA State/Local ARRA
a Rail Safe Water Harbor, Dams & Levees 7% Electric Grid Trump Infrastructure Spending Scenario Airports 9% 48% Public Transit 9% 9% Highway & Bridge 2% 2% 9% 34
a Rail Safe Water Airports Harbor, Dams & Levees 4% 3% 9% 2% 4% 2% 1% Electric Grid Trump Infrastructure Cement Distribution Public Transit Highway & Bridge 76% 35
Trump Infrastructure Assessments a 15-18 Months Pouring is not going to happen anytime soon. House & Senate Passage. Federal & State Paperwork Bid Letting & Review Contractor Award to Construction Heightened concern about national debt will reduce the size of infrastructure spending bill. Assume $250 Billion over 5 years. Trillion $ is unlikely. Allocation versus spending reduces stimulus to cement consumption in early years of the program. Only 70% of the program allocated during the horizon and only 41% actually spent during the horizon. States may cut back expenditures on expectation of federal funding sterilizing the impact of infrastructure. Assumes a 20% sterilization
Stage II: Immigration Reform a
a Immigration Scenario Based on Center for Immigration Studies, past peak deportations were roughly 400,000 and 5,000 customs agents were deployed. That translates into 80 annual deportations per agent. Greater powers could imply higher deportations per agent. Trump hires 10,000 additional agents. At 80 deportations per agent, that implies a potential of 1.2 million deportations. 46% of deportees return within one year. That leaves a net decline of roughly 650,000 annually. This is supplemented with voluntary departures of roughly 500,000 annually. 60% of which return in one year. That leaves a net total decline in illegal immigrants of 850,000 annually. 38
The Wall : Cement Consumption Low Baseline High Border length Natural Barrier In Place Barriers * Length To be built Cement Consumed Cement Consumed Cement Consumed Miles Metric Tons Total 1,933 973 442 516 601,377 1,075,902 1,550,426 Texas 1,241 954 160 127 147,442 263,783 380,124 Arizona 373 19 155 199 230,529 412,430 594,332 New Mexico 180 0 0 180 211,113 377,695 544,276 California 140 0 130 11 12,294 21,994 31,695 Annual consumption based on Four Year Build 150,344 268,975 387,606 Other material adjustment (Percent Concrete) 50% 75% 90% Annual consumption based on Four Year Build, Material Risk 75,172 201,732 348,846 Assumes existing barriers will not require replacement Low estimate based on a 20' tall wall 8" thick. High estimate based on a 60' tall wall 12" thick. * Excludes Vehicle Barriers
Market & Policy Response a
a Marketplace Reaction Financial markets react first as inflation expectations get baked into long interest rates. The yield curve steepens. Risk premiums on loans begin to edge up. Pressure on wages increases as unemployment is pushed lower. Nonlinear relationship. Wages increase faster given a 100 basis point decline in unemployment when rates are at 4%, than when they are at 5%. 41
a Marketplace Reaction With wage increases, labor force expands. Business invests in labor saving machinery results in a tripling in labor productivity by 2021 (If not, wages rise further). This investment will occur during a period of monetary policy tightening (high and rising interest rates). Some jobs are foregone to detriment of GDP growth. 42
Real GDP Outlook vs Potential 4.0% 3.5% 3.0% Growth Potential: High Range 2.5% 2.0% Growth Potential: Low Range 1.5% 1.0% 0.5% 0.0% 2017 2018 2019 2020
Next Federal Reserve Chairman Current Term Ends February 1, 2018 a Probability Monetary Policy Regulation Jerome Powell 41% Dove Tilts Strict Kevin Warsh 27% Hawk Big Ease John Taylor 19% Hawkish Ease Janet Yellen 10% Dovish Strict Gary Cohen 7% Dove Ease Others 5% ------- ------- Federal Reserve Board of Governors consists of 7 members that are appointed by the President and confirmed by the Senate. Trump may appoint 5. 44
Federal Funds Rate & Chairman Changes 25 Prior -0.21 After -1.77 Prior.41 After 2.88 Burns Volker Greenspan Bernanke Yellen 20 Miller Prior 0.48 After 0.10 Prior 0.79 After 0.75 Prior -.01 After.20 15 Prior 0.80 After 1.03 10 5 0 Nov 1969 Nov 1972 Nov 1975 Nov 1978 Nov 1981 Nov 1984 Nov 1987 Nov 1990 Nov 1993 Nov 1996 Nov 1999 Nov 2002 Nov 2005 Nov 2008 Nov 2011 Nov 2014
Conclusion a
a Portland Cement Consumption Thousand Metric Tons 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2016 = 2.4% 2017 = 1.7% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Comparative Stimulus: Housing vs Trump a $250 3 Yr Average: 6.41% $200 2003: 5.7% 2004: 6.3% $150 2005: 6.6% Stimulus: 9.6 MMT 110 Stimulus: 12.6 MMT 230 $100 87 $50 55 $0 Housing 2005 Spending Intensity Trump
Cement Outlook Ed Sullivan, SVP & Chief Economist December 2017 I Brooklyn Center, Minnesota