Construction Market Opportunities and Risks

Speakers Global Construction Outlook Chris Holling, Executive Managing Director, Construction Services U.S. Construction Outlook Sara Johnson, Managing Director, Global Macroeconomic Group State Construction Outlook Scott Hazelton, Senior Consultant, Construction Services Outlook on Construction Costs, with a Special Focus on Steel John Anton, Director, Steel Service 2

A Suite of Construction Capabilities Drawing from the wide range of Global Insight s coverage of measures of construction activity and the drivers of construction Annual Global Construction Study U.S. Quarterly Construction Briefing and Database U.S. State Quarterly Construction Briefing and Database More info: www.globalinsight.com/construction Sizing of the value of construction put in place by construction segment, analysis of trends, and explanation of forecasts. Accompanied by a full historical and forecast data analysis tool in Excel 4

Strategic Markets Total Construction Growth and Risk Top 15 Markets Total Construction Spending Growth (CAGR% 2003-2008) 10% 9% 8% 7% 6% United States 5% 4% 3% 2% High Growth/Low Risk United Kingdom Canada Spain Italy France Germany Low Growth/Low Risk Hong Kong Australia Korea Japan India Mexico China Brazil Average Forecast 0% 10% 20% 30% 40% 50% 60% 70% Construction Risk Score (5 Year) Circle Size =Total Construction Spending in 2003 Average Risk High Growth/High Risk Low Growth/ HighRisk 5

Strategic Markets Residential Growth and Risk Top 15 Markets 10% High Growth/Low Risk India High Growth/High Risk Residential Construction Spending Growth (CAGR% 2003-2008) 9% 8% 7% 6% 5% 4% 3% 2% Korea United Kingdom Canada Netherlands Germany United States Spain Low Growth/Low Risk Australia Italy France Japan China Mexico Average Forecast Growth Brazil 0% 10% 20% 30% 40% 50% 60% 70% Construction Risk Score (5 Year) Circle Size =Total Construction Spending in 2003 Average Risk Low Growth/ High Risk 6

China Construction by Segment 350 300 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US$ Billion Residential Non residential bldgs Infrastructure 7

The U.S. Economy Is Expanding 8 (Annual percent change, 2000 dollars) (Percent) 7 6 6 4 5 2 4 0 3-2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2 Real GDP Growth Unemployment Rate 9

Interest Rates Will Rise Through 2005 10 (Percent) 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Federal Funds 10-Year Treasury 30-Year Mortgage Rate 10

Trading Places: Residential Construction Peaks as Nonresidential Constructions Hits Bottom 1.3 (Index, 2001:1=1.0 1.2 1.1 1.0 0.9 0.8 0.7 2001 2002 2003 2004 2005 2006 2007 2008 Total Private Construction Residential Nonresidential 11

Home Building Will Fall as Interest Rates Rise 3.0 (Housing starts, millions of units) 2.5 2.0 1.5 1.0 0.5 0.0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Single-Family Multi-Family Manufactured 12

Housing Demand and Supply Trends by Decade 2.5 2.0 1.5 D S D S D S D S D S 1.0 0.5 0.0-0.5 1965-70 1970s 1980s 1990s 2000s HH Formation Vacancies & 2nd Homes Removals Starts (Single) Starts (Multi) Starts (Manufactured) 13

Stages of Home Buying Second-Home Market: Only 4% of homes purchased in 2003 were second homes Second-home sales are driven by an older demographic 78% are vacation homes, 22% are investment properties 70 60 50 40 30 20 10 Median Age of Home Buyer (Years) 0 First-Time Buyers Repeat Buyers Second-Home Buyers Source: National Association of Realtors 14

Demographic Demand Growth Is Strongest for Second-Home Purchases Second-home demand is growing nearly twice as fast as repeat demand and four times as fast as first-time purchase demand As the baby boom ages, second-home demand growth will remain strong First-time demand growth edges up as Generation Y starts forming households % growth in demographic index 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1988 1990 Demographic Demand Growth 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 First Time Purchase Second Home Purchase Repeat Purchase All Home Buyers Sources: U.S. Census Bureau & Global Insight; age distribution data from The National Association of Realtors 15

Delayed Recovery in Nonresidential Construction 20 (Year-over-year percent change, 2000 dollars) 10 0-10 -20 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Real Nonresidential Construction Real GDP 16

U.S. Construction Growth in Key Sectors (Percent change, 2000 dollars) 2002 2003 2004 2005 2006 Total Construction -0.7 1.7 3.6-1.5-0.5 Residential 7.1 7.9 7.1-7.1-3.7 Commercial -21.9-10.1 1.4 6.9 4.4 Manufacturing -46.0-18.7-6.1 18.9 17.8 Health-care Building 11.1 5.2-3.2-1.7-2.7 Educational Building 7.5-1.1 2.2 8.7 4.1 Power 10.4-5.7-12.5-2.9-8.2 State and Local Govt. 3.5-0.8-1.1 5.1 4.1 17

Commercial Construction: Slow Upturn in Offices $60,000 (Billions of 2000 dollars) $50,000 $40,000 $30,000 $20,000 $10,000 $0 1994 1996 1998 2000 2002 2004 2006 2008 Office Lodging Retail Buildings 18

U.S. Job Growth Will Be in Service Sectors 6 (Percent change) 4 2 0-2 -4 Professional & Business Sv. Health & Education Financial Services Office Employment 2002 2003 2004 2005 2006 19

Cycles in Industrial Investment in Structures 50 (Billions of 2000 dollars) 40 30 20 10 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 Manufacturing Mines & Wells Utilities Ex. Communications 20

Limited Recovery in Manufacturing Construction (Billions of 2000 dollars) 1998 2003 2004 2005 2006 Total Manufacturing 43.70 12.54 11.78 14.00 16.50 Food Processing 3.82 1.50 1.40 1.83 2.10 Chemicals 8.86 3.03 3.23 3.93 4.50 Plastics 2.30 0.32 0.52 0.77 0.92 Primary Metals 1.60 0.43 0.34 0.16 0.13 Fabricated Metals 2.19 0.37 0.33 0.39 0.47 Transportation Equip. 3.77 2.28 2.45 3.23 3.30 Computers 8.16 0.83 0.98 1.20 1.68 21

Turning Point for Many Construction Segments Historical Real Growth (CAGR 2002Q1-2004Q1) 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Single Family Military Sewer Medical Office Multi Family Conser. & Devel. Power Transp. Hospitals Lodging Gov't Misc. Public Decelerating Educational Building Religious Amusement Water Roads Warehouse Communication Retail Office Mfg. Special Care -30% -20% -10% 0% 10% 20% 30% Forecast Real Growth (2004Q1-2005Q1) Accelerating Bubble Size: value of construction in 2004 22

Commercial Sector Office Lodging Non-Auto Retail Auto Retail Warehousing 24

Office Construction is the Leader Office construction growth turned positive on a year-earlier basis in 2003 Improving financial markets and renewed growth in business services will keep growth positive Office Employment Growth versus Office Construction Growth 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 20 15 10 5 0-5 -10-15 04/01/93 04/01/96 04/01/99 04/01/02 04/01/05 04/01/08 Office Employment Office Construction 25

Office Construction: Not All States Are Equal California s office construction market suffered more than New York s in the recession New York s office construction market was in trouble before 9/11 All three financial centers should outpace the nation over the forecast California is still the place to be Comparative Office Construction Growth (Percent) 50 40 30 20 10 0-10 -20-30 -40-50 1994 1996 1998 2000 2002 2004 2006 2008 Illinois California New York 26

Hotel Construction Indicating Recovery Hotel construction growth was slowing as early as 1999 Consumer and business travel faded with travel fears and the recession Growth has see-sawed in recent months Economic expansion will fuel business travel, and increasing incomes will promote tourism Danger from fuel prices appears low Hotel Construction versus Employment in Accomodation and Food Services 1.5 1.0 0.5 0.0-0.5-1.0-1.5 04/01/93 04/01/96 04/01/99 04/01/02 04/01/05 04/01/08 Employment Construction 30 20 10 0-10 -20-30 27

Hotel Outlook for High-Travel States Hawaii was hardest hit of the states Hawaii is more exposed to overseas travel than other states Florida will be the best bet of the larger states over the forecast New York s recovery will be more modest, but will still outpace the nation Comparative Hotel Construction (Percent) 100 80 60 40 20 0-20 -40-60 -80 1997 1999 2001 2003 2005 2007 Hawaii Florida New York 28

Strong 2005 for Retail Construction An extended period of under-investment in new store space relative to sales growth suggests that retail store construction is due for a rebound next year Growth of Retail Store Construction Compared to Retail Sales Growth (Percent) 18.0 15.0 12.0 9.0 6.0 3.0 0.0-3.0-6.0 1994 1996 1998 2000 2002 2004 2006 2008 Retail Store Construction Retail Sales 29

Specialty Shopping Outlets Building supply stores benefited from the homebuilding boom and rivalry between major retailers Drug stores have steadily gained construction share over the past decade with chain expansion, more product offerings, and health consciousness Restaurant construction will tilt toward full-service eateries Composition of New Construction (Percent) 10 8 6 4 2 0 01/01/93 01/01/96 01/01/99 01/01/02 Building Supplies Drug Stores Restaurants Other Retail 35 30 25 20 15 10 5 0 30

Building Material Sales and Housing Turn 15% 10% Growth (%) 5% 0% -5% -10% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Retail Sales at Building Material and Supply Stores New and Existing Home Sales 31

Major Shopping Outlets General merchandise stores were hardest hit in the recession Growth in Wal-Mart was offset by several major chain failures Mall construction has relatively small share but is highly cyclical and appears to be on an upswing Shopping centers have become the concept of choice in recent years Composition of Construction (Percent) 30 25 10 20 8 15 6 10 4 5 2 0 0 01/01/93 01/01/96 01/01/99 01/01/02 General Merchandise Shopping Centers Malls 12 32

Retail Expansion Moves South California performed somewhat better than most states in the recession, partly due to population growth Virginia offers an attractive combination of population and income growth Texas could perform better should high fuel prices persist, given its large energy sector Comparative Retail Construction Growth (Percent) 40 30 20 10 0-10 -20 1995 1997 1999 2001 2003 2005 2007 Texas California Virginia 33

Auto-Related Activity Shifts to Service Booming car sales over the previous decade shifted construction investment to new showrooms Strong but slowing car sales over the forecast suggest more maintenance costs and new repair space The relative shares move toward historic norms Composition of Auto-Related Construction by Use of Structure (Percent) 80 70 60 50 40 30 20 10 0 01/01/93 01/01/96 01/01/99 01/01/02 01/01/05 01/01/08 Auto Sales Space Parking Service 34

Warehousing Poised for Recovery A strong economy and the impact of NAFTA drove warehouse construction in the mid-1990s A slowing economy and improved inventory control practices created an overhang of space by 2001 Rising wholesale trade employment has worked off some of that excess, and new warehouse construction has expanded in recent months Warehouse Construction versus Industry Employment (Percent) 100 80 60 40 20 0-20 -40 94Q1 96Q2 98Q3 100Q4 103Q1 105Q2 107Q3 109Q4 Warehouse Construction 6 4 2 0 Wholesale Trade -2-4 35

Prices Spike to New High, Are About to Fall Prices will back off Scrap retreating Better weather aids movement Ocean freight rates restraining exports Bubble is popping Supply is easing Coke shortage expected to fade High prices are restraining demand Prices do not fall all the way back to old levels Raw material tightness is a fact of life (Dollars per ton) 625 575 525 475 425 375 325 275 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 37

Quick Overview of Steel Forecast World China drives it all General recovery, but not Western Europe Overcapacity disappears into Chinese demand Prices, near peak, will fall rapidly in the second half of 2004 United States Demand recovery is under way Recover through 2006, expand afterwards Dollar changes trade flows Great year for raw materials, good year for mills, bad year for buyers 38

United States The Fundamentals are Shifting Consolidation means fewer sellers with more power A weaker dollar Imports will be choice of last resort Exports will be a viable market New labor contracts Integrateds costs will be lower Narrows gap with electric mills Raw materials will cost more Weak dollar makes imported ore and coke more expensive Also makes scrap exports more lucrative Energy prices feel same pinch Competing with China for scarce(!) inputs 39

World Steel Present Exchange Rates Exchange rates are changing everything Dollar is currency for most international steel transactions Strong through 2000 Appreciated 50% against euro from December 1996 to October 2000 Lower cost for imports into United States Higher cost for raw materials Weakened since late 2000 Gave back all the gain, and is 5.3% below January 1999 level More important than Section 201 for stopping imports Lowers costs for foreign mills, but also lowers selling price China pegs its currency to the dollar, so is seeing same effects Will China revalue? 40

World Steel Present Exchange Rates Dollar Fall Moderates, But Continues Dollar Falling Against Euro, Yen 1.2 150 (Dollar vs Major trading partners, 2000=1.0) 1.1 1.1 1.0 0.9 0.8 125 100 1.0 0.9 0.8 0.7 1993 1995 1997 1999 2001 2003 75 0.7 1996 1998 2000 2002 2004 2006 2008 2010 Euro (Left axis) Japanese yen (Right axis) 41

World Steel World approaching 1 billion tonnes of production February 2004 up 12% year over year China is primary source of growth Capacity utilization rising Production is straining raw material inputs Coke, scrap, and ore are all scarce and expensive Demand expanding as economies improve Prices shoot to new highs Global spike reflects U.S. experience Mitigated by strength of foreign currencies 42

Global Steel Production (Millions of metric tonnes, annual rate) 1100 1000 900 800 700 600 1995 1997 1999 2001 2003 732 946 million million 43

Global Production Booms, China is 60% of Increase World (Millions of metric tonnes, annual rate) 1100 1000 900 800 700 600 1995 1997 1999 2001 2003 China (Millions of metric tonnes, annual rate) 300 250 200 150 100 50 0 1995 1997 1999 2001 2003 94 219 million million 44

Chinese Consumption Still Has Room to Grow Chinese Apparent Consumption (Millions of metric tonnes) 250 Per Capita Still Far Below U.S. (Metric tonnes per person) 0.50 200 211.2 0.40 150 100 97.3 103.5 113.9 130.8 141.2 174.2 0.30 0.20 0.10 50 0 1996 1997 1998 1999 2000 2001 2002 0.00 1996 1997 1998 1999 2000 2001 2002 U.S. China 45

Appendix 46

A Solid Foundation of Analysis. 47

Of Key Construction Segment Drivers 48

And Full Accounting of Linkages 49

Construction Market Segments Market Segments Covered by the Study Residential Infrastructure Nonresidential structures Office Commercial Institutional Industrial Utilities Communications Petroleum refining Transportation equipment Chemicals Electrical and electronic products Food processing Other 50

U.S. Construction Segment Detail Millions of Dollars (Annual Rate, SA) Total Construction Residential Building Single Family Multi Family Commercial Office Lodging Automotive Parking Retail Buildings Warehouse Nonmanufacturing Total Manufacturing Mfg Food Processing Mfg Chemicals Mfg Plastics Mfg Nonfabricated Metals Mfg Fabricated Metals Mfg Transportation Mfg Computers Total Healthcare Building Hospitals Medical Office Buildings Special Care Buildings Total Education Building Religious Building Total Amusement Government Buildings Conservation and Development Highways and Streets Military Misc. Public Sewer Construction Water Supply Communications Power Electric Transportation Land 51