U.S Cement Outlook IEEE Ed Sullivan Group VP, Chief Economist 1
Construction Activity Billion Real $ 1,400 1,200 1,000 2014 = 2.5% 2015 = 5.6% 800 600 400 200 0 12 Year Peak-to- Peak Recovery 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Portland Cement Consumption Thousand Metric Tons 140,000 120,000 100,000 2014 = 8.7% 2015 = 7.5% 2016 = 7.9% 80,000 60,000 40,000 20,000 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Composition of Changes in Cement Consumption Share of Total Growth 2014: +7.0 MMT 2015: +6.3 MMT Public 33% Res 14% Public 21% Non Res 54% Non Res 17% Res 62%
Economic Outlook
Economic Growth Gross State Product (GDP), Annual Percent Change 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: BEA, PCA 6
Economic Growth Gross State Product (GDP), Annual Percent Change 5% 4% 3% 2% 1 st Q = 1.1% 2 nd Q = 3.5% 3 rd Q = 3.5 % 4 th Q = 3.0 % 1% 0% -1% -2% -3% -4% 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: BEA, PCA 7
Putting Things Into Context: Economic Outlook Job creation approximates 3.0 million net new jobs 2015-2017. Stronger household formation Strong job growth in context of sub-6% unemployment suggests pressure on wages. Consumer confidence/sentiment has improved significantly and is expected to continue. Low oil prices add 20-30 basis points to economic growth. Regional disruptions among energy producing states.
Putting Things Into Context: Economic Outlook Inflation remains low, interest rates expected to only gradually increase, slower increases in home prices and stronger increases in rents. New home affordability remains favorable in absolute terms and against rents. Lending risks subside and lending standards ease. Economic recovery moving into higher growth phase in the years ahead. Roughly 3% growth on a sustained basis. Healing of excesses, and huge pent-up demand.
Consumers Are Ready to Propel Growth Debt-to-Income ratio at 18 year best, Job creation continues at a monthly rate of 225K to 250K. Job creation occurs in the context sub-6% unemployment. Pressure on wages begin to of emerge. Oil price declines, if sustained, add 0.3% to 0.4% consumer spending growth. While pressure gradually mounts, inflation and interest rates remain low. Consumer Wealth remains strong via home price increases and stock performances. Unprecedented levels of pent-up demand exist. Consumer sentiment rapidly improving.
Strong Dollar
Weighted Average Exchange Value of U.S. Dollar Major Currencies Index 95 90 85 80 75 70 65 (Index Mar-1973=100, NSA) Lowers Inflation Hinders Interest Rate Pressures Reduces US Exports 60 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 19%
IPM New Order Index 70 65 60 55 50 45 40 35 30 25 Dollar Vs Purchasing Manager Index: New Orders IPM New Orders Dollar Vs Major Currencies IPM New Orders Declines 6% in Past 12 Months. Implies continued expansion but at less robust Rate than Previously Expected 20 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Dollar Index 100 90 80 70 60 50 40 30 20 10 0
Oil Impact
Oil Prices & Baker Hughes Rig Count WTI Oil Prices 160 140 120 100 80 60 40 20 Baker Hughes Rig Count WTI Oil Prices Rig Count 2,500 2,000 1,500 1,000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0
West Texas Intermediate Oil Prices Per Barrel 120 100 80 $66.02 $99.57 $79.40 $94.12 $93.10 $76.20 $86.60 $97.00 $107.40 60 $55.00 40 20 0 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Shale Breakeven Points Survey Location Estimated Breakeven Price Marcellus Shale - SW Liquid Rich Pennsylvania $24.23 Marcellus Shale - Super Rich Pennsylvania $25.63 Utica - Wet Gas Ohio $32.39 Missippian Horizontal - East Mississippi $42.15 Utica - Liquid Rich Ohio $44.04 Eagle Ford - Liquids Rich Texas $46.02 Niobrara - Wattenberg CO, WY, Neb $46.10 Wolfcamp - N. Midland West Texas $53.92 Eagle Ford - Oil Window Texas $55.29 Wolfcamp - S. Midland Texas $61.57 Missippian Horizontal - West Mississippi $64.05 Wolfberry Texas $64.63 Bakken Shale Montana, North Dakota $64.74 Wolfcamp - N. Delaware Texas $68.54 Uinta - Green River Utah, Colorado $68.77 Uinta - Wasatch - Horizontal Utah, Colorado $72.15 Granite Wash - Liquid Rich KS, TX, OK $73.10 Uinta - Wasatch - Vertical Utah, Colorado $74.95 Barnett Shale - Southern Liquid Rich Texas $84.45 Category One Category Two Category Three
Fed Policy
Federal Reserve Interest Rate Assumptions Strong dollar, weak global conditions, low oil prices, spot slack conditions and low wage rate gains suggest slow inflation increases. Past recession worst since post-wwii and recovery has been slow. Fed (Yellen) likely to err on over stimulate. Suggests a somewhat bigger window for raising rates (3 rd Q). Rate increases probably smaller and longer time lapses between increases.
Housing Outlook
Housing Assessments Perspective: SF Sales: 7.46 million (2005). 4.76 million (2014). 36% below past peak. Total Starts: 2.07 million (2005). 1.0 million (2014). 52% below past peak. SF Starts: 1.72 million (2005). 0.65 million (2014). 62% below past peak. MF Starts: 0.36 million (2005). 0.36 million (2014). At pre-recession levels. Large housing starts percentage increases expected by PCA must take into consideration the current low levels of activity.
8,000 7,000 6,000 5,000 Recession SF Home Sales Thousand Units 23% Price Decay 4,000 3,000 2,000 Distressed Sales 22
6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% Home Sales to Employment Ratio Home Sales/Employment 23
Housing Assessments: Credit Access Credit Qualifications: Stronger job market implies stronger FICO scores. Equivax states 45% of all consumers have a FICO score below 700. This compares to 47% in 2005. FICO credit-score calculations have recently eliminated records of a consumer failing to pay a bill if the bill has been paid and less weight to unpaid medical bills that are with a collection agency. For borrowers in the 580-619 range, those who are close to a lender's typical credit score minimum, 45% of that population saw their scores improve enough to meet the credit score threshold,"
Housing Assessments: Credit Access Credit Qualifications: Nations mortgage rules were recently made by the Consumer Financial Protection Burea (CFPB). Dodd-Frank Protection remains in place, but opens up access to mortgage market via the Qualified Residential Mortgage rule. Ability-to-repay guidelines adds clarity to lenders. Eliminates the 20% down payment requirement if banks don t hold 5% of mortgages on its own books. Reduces FICA scores. More favorable guidelines for packaging & selling mortgage securities. Stronger job market implies stronger FICO scores.
Housing Outlook 2,500 Housing Starts Thousands of Units 2,000 1,500 1,000 500 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
40% 35% 30% 25% 20% 15% 10% 5% 0% Starts Composition Multifamily Starts Share of Total 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Nonresidential Outlook
Simplified Version of Nonresidential Recovery Investment in nonresidential commercial properties is determined by expected ROI. Expected ROI = NOI + Expected Asset Appreciation. Expected Asset Appreciation = NOI performance. NOI performance = Occupancy & Leasing rates. Occupancy & Leasing Rates = Employment
Update: Job Creation Relationship to Changes in Cement Consumption 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Past 12 Months, Thousand Net New Jobs, Thousand Tons c c Net Job Creation Change in Cement Consumption 30
Nonresidential Recovery: Construction Details 2013 2014 2015 2016 2017 2018 2019 Nonresidential Buildings 3.8% 8.2% 8.8% 8.3% 6.3% 4.7% 3.7% Industrial 3.2% 9.3% 8.8% 4.4% 3.3% 1.4% 0.7% Office 7.6% 13.9% 12.3% 15.6% 9.6% 6.6% 3.9% Hotels, Motels 23.0% 6.3% 8.1% 6.3% 5.5% 5.1% 5.2% Hospitals, Institutions -7.7% -7.5% 2.5% 3.2% 3.1% 4.3% 4.9% Religious -12.3% -2.3% -1.0% 0.3% 2.0% 3.3% 3.1% Educational -0.8% -3.8% 2.5% 3.3% 4.3% 4.4% 5.0% Other Commercial 6.8% 17.6% 11.8% 10.8% 8.6% 6.4% 5.3% 31
Nonresidential Construction Activity Million Real $ 30,000 25,000 20,000 15,000 10,000 5,000 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Nonresidential Cement Intensities Tons per million real $ 140 120 100 21% Increase 2014 80 60 40 20 2003 2005 2007 2009 2011 2013 2015 2017 2019
Nonresidential Cement Intensities Tons per million real $ 140 120 Adds 5.7 MMT 100 80 60 40 20 2003 2005 2007 2009 2011 2013 2015 2017 2019
Public Outlook
300 Public Construction Million Real $ Seven Years Decline 250 200 150 100 2014 = -2.1% 2015 = +1.6% 50 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
State Highway & Street Funding Model Gross State Product State Fiscal Assessment Note: Simplified Flow. Many steps required to reach each bubble. Discretionary Highway Expenditures MAP-21 Allocation Total Highway Funding GSP = Gross State Product (Real). Indicates economic activity at the state level.
$000 150,000,000 State Deficit Outlook Net Balance (Revenues Less Expenditures) 100,000,000 50,000,000 0-50,000,000-100,000,000-150,000,000-200,000,000-250,000,000-300,000,000 2007 2009 2011 2013 2015 2017 2019
Share of State Expenditures On Transportation 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 2000-2008 Average = 2.25% 1.0% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Local Employment & Home Prices 20% 15% 10% 5% 0% -5% -10% -15% -20% Jan 2005 Jul 2006 Home Prices Lagged Three Years Jan 2008 Jul 2009 Jan 2011 Jul 2012 Based on Three Year Lag Between Home Prices and Employment, the ongoing improvement in prices implies a significant upturn in local spending beginning in 2015 Jan-14 Jul-15 14,700 14,600 14,500 14,400 14,300 14,200 14,100 14,000 13,900 13,800 13,700 13,600
Summary
Portland Cement Consumption Thousand Metric Tons 140,000 120,000 100,000 2014 = 8.7% 2015 = 7.5% 2016 = 7.9% 80,000 60,000 40,000 20,000 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Capacity Utilization Annual Production Divided by Capacity 100% 80% 60% 95% 84% 62% 67% 76% 89% 90% 40% 20% 0% 2006 2008 2010 2012 2014 2016 2018 43
Import Share Import Volume Divided by Total Consumption 30% 25% 28% 20% 15% 20% 10% 5% 12% 10% 9% 9% 9% 0% 2006 2008 2010 2012 2014 2016 2018
Longer Term Outlook
US Population Millions of Persons 390 370 350 330 310 290 270 250 230 210 190 58 Million More Persons +18% 2000 2005 2010 2015 2020 2025 2030 2035 Source: US Census Estimates
0.500 0.450 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 Projected Per Capita Cement Consumption Metric Tons Consumed/Population 0.000 2000 2005 2010 2015 2020 2025 2030 2035
Cement Consumption Million Metric Tons 200 175 Cement Consumption 150 125 100 75 50
Projected Cement Consumption & Production Metric Tons 200 175 Cement Consumption 150 125 Supply Gap 100 75 50 Cement Production
Consumption in Excess of Long-Term Supply 60 Thousand Metric Tons 50 40 30 20 10 0-10 -20-30 2002 2007 2012 2017 2022 2027 2032
U.S Cement Outlook IEEE Ed Sullivan Group VP, Chief Economist 51