Cement & Construction Outlook Minnesota Concrete Council November 17, 2011 Dave Zwicke, PCA Analytics Manager, Sr. Economist
Bottom Line Economy in a slow growth period characterized by tepid job gains. Limited policy tools to stimulate. More than 1 in 3 chance of double dip in 2011/2012 Only marginal gains in residential construction Hindered by foreclosures, tight lending standards and slow job growth. Nonresidential engaged in a long, slow healing process Process has only begun. Public no longer a key positive State deficits and lower property taxes will have negative affect
Risk of Recession % Probability the U.S. will Enter a Recession in 6 months 60 50 40 30 20 10 0 Source: Moody s 5/1/2010 7/1/2010 9/1/201011/1/20101/1/2011 3/1/2011 5/1/2011 7/1/2011 9/1/2011
Portland Cement Consumption: Fall Outlook Thousand Metric Tons 140,450 120,450 100,450 80,450 60,450 40,450 20,450 Growth Rates 2007: - 9.6 2008: - 15.1 2009: - 26.9 2010: -0.1 2011: + 1.2 2012: + 0.5 2013: + 7.3 2014: + 15.6 U Shaped Recovery: Prolonged 450 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: PCA
Construction Turning Points Real Construction Spending Index, 1997=100 160 Residential 140 Public 120 100 80 Nonresidential 60 Source: PCA 40 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Economic Outlook
Economic Headwinds 2007 2008 2009 2010 2011 2012 Housing Energy? Financial Crisis Inflation Labor Markets State Deficits
U.S. Unemployment Rate Improving Unemployment Rate (L) Labor Force (Mil) (R) 12.0 110 10.0 8.0 Workers Not Yet Reentering Workforce 108 106 104 6.0 102 4.0 2.0 U.S. Unemployment Rate 100 98 96 0.0 Source: BLS 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 94
Getting back to Even Employment, Index = Recession Start 106 104 1980-82 1990-91 2001 2007-2009 102 100 98 96 94 92 90 Source: PCA/BLS 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46
Minnesota Unemployment Unemployment Rate 12.0 = Recession 10.0 8.0 6.0 U.S. 4.0 2.0 Minnesota Source: BLS 0.0 1990 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Minnesota Job Growth Year-over-Year Change in Employment As of: September 2011 Contracting Expanding Source: BLS
U.S. Job Growth a little better than reported Net Job Loss/Gain (000) 300 250 200 150 100 50 0-50 -100-150 -200-250 Jun-2010 Sep-2010 Dec-2010 Mar-2011 Jun-2011 Sep-2011 Source: BLS Net Job Growth Private Sector Job Gr.
Businesses Remain Cautious Small Business Optimism Index 120 115 110 105 100 95 90 85 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: National Federation of Independent Businesses
European Sovereign Debt Concerns 10 Y Treasury Yields 20 18 16 14 12 Greece Ireland Italy Germany 10 8 6 4 2 0 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Source: European Central Bank (ECB)
Total Sovereign Debt by Nation USD, billions as of 2010 12,000 10,000 Rank 1st Rank 2nd Rank 3rd Rank 4th Rank 13th 8,000 6,000 4,000 2,000 0 USA Japan Germany Italy Greece Source: CIA 2011 World Fact Book
Residential Construction
Foreclosures Stabilize 5.4 4.9 4.4 3.9 3.4 2.9 2.4 1.9 1.4 0.9 % of loans 90 days past due, SA % of loans in foreclosure, SA 0.4 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 Source: Mortgage Bankers Association
Existing Home Sales - Minnesota Existing Home Sales, 000 SAAR Home Tax Credit Expirations 160 140 120 100 80 60 40 20 Home Prices (R) 425 375 325 275 225 175 125 0 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 75 Source: National Association of Realtors
Minnesota Home Prices Undervalued? 3.5 Median Home Price / Average Household Income 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 Source: Census
Single Family Construction: Minnesota Single Family Permits, Units 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Excessive inventories continue to stifle new home construction 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
SF: Coiled Spring or Structural Change? Population Growth Per Housing Start Housing Supply = 600,000 Single family = 450,000 Multifamily = 100,000 Manufactured = 50,000 Housing Demand = 1,350,000 HH formations = 800,000 Replacement = 350,000 Second Homes = 200,000 Source: PCA
Nonresidential Construction
Risk of Eurozone Contagion? Yes & No 3.5 Sub Prime 3.0 2.5 2.0 1.5 1.0 S&L Crisis Orange County Peso Crisis Asian Financial Crisis LCMT Y2K Tech Bubble Euro Sovereign Debt 0.5 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 TED Spread Difference between 3m T-Bill & LIBOR
U.S. Nonresidential Construction Spending Real $, millions 200,000 180,000 160,000 140,000 120,000 100,000 80,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Moody s Investors Services
Office Building Construction Spending 120 2002 = 100 100 U.S. 80 60 40 Source: PCA 20 0 Minnesota 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Office Outlook Minnesota Cement Consumption - Metric Tons 60,000 50,000 40,000 30,000 20,000 10,000 2009: -57% 2010: -50% 2011: +12% 2012: +26% Source: PCA 0 2002 2004 2006 2008 2010 2012 2014
Retail Sales Have Recovered Annual Percent Change 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% 00 01 02 03 04 05 06 07 08 09 10 11 Source: U.S. Census Bureau
Retail Building Construction $, Millions, Real 1996 Dollars 120 100 U.S. 80 60 40 20 Minnesota 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: PCA
Retail Outlook Minnesota $, Millions, Real 1996 Dollars 800 700 600 500 400 300 200 100 2009: -15% 2010: -32% 2011: +8% 2012: -9% 0 2002 2004 2006 2008 2010 2012 2014 Source: PCA
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Medical/Institution Outlook U.S. $, Millions, Real 1996 Dollars 25,000 20,000 15,000 10,000 5,000 2009: -1.4% 2010: -5.5% 2011: -5.6% 2012: +6.1% Expected to Remain Strong With or Without Healthcare Reform Source: PCA 0 2002 2004 2006 2008 2010 2012 2014
Commercial Construction - Order of Recovery Rankings based on: Office, Industrial, Retail and Hospitality Employment Trends WA MT ND NH VT ME OR MN ID WY SD WI MI NY MA RI CT CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD AZ NM OK AR TN SC NC MS AL GA TX LA FL HI Source: PCA Early Recovery Average Recovery Late Recovery
Public Construction
State Fiscal Conditions FY 2012 Deficit Share of General Fund WA MT ND NH VT ME OR MN ID WY SD WI MI NY MA RI CT CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD AZ NM OK AR TN SC NC MS AL GA TX LA FL HI Source: PCA/CBPP June 2011 No Shortfall Minor Moderate Severe
Public Buildings $, Millions, Real 1996 Dollars 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Source: PCA 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Public Building Outlook Minnesota Metric Tons 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 2010: -14% 2011: -10% 2012: +6% 10,000 0 2004 2006 2008 2010 2012 2014 Source: PCA
Federal Highway Funding Stimulus has run its course. 83% of stimulus funds spent nationally 97% of Minnesota s stimulus funds spent Federal Highway Bill (SAFETEA-LU) Expired - 2009 8 Extensions since bill expired Next Deadline March 30, 2012 Outlook for next bill No Funding Increase (Possible Cut) Minimum of 20% increase necessary to maintain buying power. Potential Jobs Bill $100 billion infrastructure investment Funding is would largely mirror ARRA
Highway Bill Cement Consumption Scenarios: Spring Vs. Current Outlook 25,000 Spring Forecast 20,000 15,000 Current Forecast 10,000 5,000 Mica Proposal 0 2002 2004 2006 2008 2010 2012 2014 Source: PCA
Highway Outlook Minnesota $, Millions, Real 1996 Dollars 1,600 1,400 1,200 1,000 800 600 400 200 2009: -29% 2010: +14% 2011: +2% 2012: -6% Source: PCA 0 2002 2004 2006 2008 2010 2012 2014
Public Construction - Order of Recovery Rankings based on: Deficits, ARRA, Employment, Long-Term Debt WA MT ND NH VT ME OR MN ID WY SD WI MI NY MA RI CT CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD AZ NM OK AR TN SC NC MS AL GA TX LA FL HI Source: PCA Early Recovery Average Recovery Late Recovery
Total Cement Consumption Minnesota $, Millions, Real 1996 Dollars 2,500 2,000 1,500 1,000 500 2009: -17% 2010: +6% 2011: -4% 2012: 1% Source: PCA 0 2002 2004 2006 2008 2010 2012 2014
Paving New Realities
Oil Price History $ Per Barrel, WTI 160 140 120 100 80 60 Old Reality: Emphasis on OPEC & Supply Side OPEC Induced Energy Crisis New Reality: Emphasis on LDC s & Demand Side Asia (excluding Japan) = 20% world Oil Demand 40 OPEC Formed 20 0 1946 1956 1966 1976 1986 1996 2006 Source: U.S. Energy Information Agency
Asphalt Price History 300 1996=100 New Reality: Emphasis on LDC s & Demand Side 250 200 Old Reality: Emphasis on OPEC & Supply Side 150 100 50 0 1982 1987 1992 1997 2002 2007 Source: Bureau of Labor Statistics, Producer Price Index
Pavement Life Expectancy Years Before Major Reconstruction Required 25 Concrete: Average = 29.3 Years Number of State DOTs Reporting 20 15 10 5 0 Asphalt : Average = 13.6 Years 1-5 Years 6-10 Years 11-15 Years 16-20 Years 21-30 Years 31-50 Years Source: PCA 2008 Highway Pavement Report
Initial Bid Paving Costs Dollars Per 2 Lane Road Mile - Urban $1,400,000 $1,200,000 Asphalt $1,000,000 $800,000 $600,000 $400,000 $200,000 Concrete 2003 2007 2011 2015 2019 Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
Concrete s Initial Bid Cost Savings Vs. Asphalt $550,000 $450,000 $350,000 $250,000 $150,000 $50,000 -$50,000 -$150,000 -$250,000 -$350,000 No EPA NESHAP 2013 2003 2007 2011 2015 2019 Source: PCA estimates using Wispave (Wisconsin DOT paving cost software)
Regulatory Impacts Most Significant Threat To Domestic Cement Production in History
U.S. Capacity Outlook: No New Capacity Expansions Planned Million Metric Tons 150 125 Cement Consumption 100 75 50 Cement Production
U.S. Capacity Outlook: Potential NESHAP Impacts Million Metric Tons 150 125 100 Cement Consumption Supply Gap: 30 MMT 75 50 Cement Production EPA: Hg Impact
Take a Step Back
Cement Consumption: Long-Term Million Metric Tons Growth in Context of Population Changes, Pent up Demand, Competitive Advantages and Green Revolution.
Cement & Construction Outlook Minnesota Concrete Council November 17, 2011 Dave Zwicke, PCA Analytics Manager, Sr. Economist