U.S. Construction & Cement Outlook

Construction & Building Materials Conference

Societe Generale, Paris

March 9, 2007

David E. Czechowski

Manager, Sr. Economist

Economic Research

Portland Cement Association

Key Points of Analysis

The Economy

Construction Spending

Cement Industry Outlook

Residential

Nonresidential

Public

Demand

&

Supply

U.S. Economic Outlook

Key Near Term Issues

Job Growth Job Growth

Length & Magnitude of Housing DeclineLength & Magnitude of Housing Decline Hard or Soft landing – Timing of RecoveryHard or Soft landing – Timing of Recovery RiskRisk - Mortgage Resets Impact on Consumer - Mortgage Resets Impact on Consumer

Oil PricesOil Prices International Demand/Disruptions/OPECInternational Demand/Disruptions/OPEC

Cement Import Volumes Cement Import Volumes

Some Retightening of Market BalancesSome Retightening of Market Balances Inventory DrawInventory Draw

(Change from prior month)

Nonfarm Employment

Job Growth

2005: +2.03 Million

2006: +1.91 Million

2007: +1.60 Million

-400

-200

0

200

400

600Thousands

00 01 02 03 04 05 06 07

Consumer Confidence

40

70

100

130

160

Index1985=100

00 01 02 03 04 05 06 07

Consumer Under PressureConfidence Relatively Good But….

Pay Increase Averages 3.5%.Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%.Health Insurance Premiums Rise 7%-11%. Property Taxes Rise.Property Taxes Rise.

Reassessments based on home appreciationReassessments based on home appreciation

Energy Prices Continue to Take a BiteEnergy Prices Continue to Take a Bite

Record Consumer DebtRecord Consumer Debt

Less Willing to Tap into Home Equity Less Willing to Tap into Home Equity Slowdown in Job CreationSlowdown in Job Creation

Real InvestmentNonresidential Structures & Equipment

-20

-10

0

10

20

30

40

Qtr/Qtr% Change

90 92 94 96 98 00 02 04 06

Real GDP Growth

-2

0

2

4

6

8

10

Qtr-Qtr% Change

I05

II III IV I06

II III IV I07

II III IV I08

II III IV

3.2% 3.3% 2.6% 2.4%

DOWNSIDERISK

U.S. Construction Markets

““The real threat to economic growth is not the decline in housingThe real threat to economic growth is not the decline in housingbut the way we financed the past boom and its impact on consumerbut the way we financed the past boom and its impact on consumerspending”spending”

Changing Composition of Construction Spending

Growth Leader: ResidentialGrowth Leader: Residential Low Interest RatesLow Interest Rates

PublicPublic State Tax Revenues Hurt by State Tax Revenues Hurt by

Anemic Economic GrowthAnemic Economic Growth

Growth Laggard: NonresidentialGrowth Laggard: Nonresidential Weak EconomyWeak Economy

Growth Leader : NonresidentialGrowth Leader : Nonresidential Steady EconomySteady Economy

PublicPublic State Tax Revenues Recovery State Tax Revenues Recovery

Due to Economic GrowthDue to Economic Growth

Growth Laggard : ResidentialGrowth Laggard : Residential Correction LagsCorrection Lags Affordability Improves slowlyAffordability Improves slowly Credit TighteningCredit Tightening

2001-2005 2006-2010Low Interest Rates

Weak Economy

Rising Interest Rates

Steady Economy

Starts Activity More Than Low Rates…

The Cyclical Upside: 2001 - 2005The Cyclical Upside: 2001 - 2005

Low mortgage rates – Lean InventoriesLow mortgage rates – Lean Inventories Emergence of exotic mortgagesEmergence of exotic mortgages

Easy credit conditionsEasy credit conditions Speculators add froth to the marketSpeculators add froth to the market

The Cyclical Downside: 2006 - 2009The Cyclical Downside: 2006 - 2009 Mortgage rates risingMortgage rates rising

Inventory DrawInventory Draw Exotic mortgages losing favorExotic mortgages losing favor

Defaults/delinquencies deteriorate credit quality and tighten credit conditionsDefaults/delinquencies deteriorate credit quality and tighten credit conditions

Speculators fade in lower appreciation rate environmentSpeculators fade in lower appreciation rate environment

Sub-Prime Mortgage Resets

Total Loans Scheduled for Reset

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Period of Emerging Period of Emerging TroubleTrouble

Inventory Draw Required

Homes on Market/Monthly Selling Rate

Ten Year Average

Inventory Build

Required

Inventory Draw

Required

Highest Level Highest Level Since 1997Since 1997

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000 2001 2002 2003 2004 2005 2006

10 Years of Inventory Build Conditions Disappear

Annual Growth Rate, Median Home Price

Improves Affordability: Stronger 2009/2010 Outlook

Speculators Leave

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2001 2002 2003 2004 2005 2006

Home Prices Will Play a Role in Correction

0.5

1.0

1.5

2.0

MillionUnits

98 99 00 01 02 03 04 05 06 07 08 09

Single Family StartsYear

2005 1.72

2006 1.48

2007 1.21

2008 1.30

Relatively Low Mortgage Rates, Home Price Correction, Builder Incentives

Nonresidential Construction

Turning Points Achieved Turning Points Achieved

Despite large percentage Despite large percentage gains for 2006, most gains for 2006, most markets weak from markets weak from historical perspectivehistorical perspective

Slower growth outlook Slower growth outlook depresses expected ROI depresses expected ROI and tempers recoveryand tempers recovery

High material costs add High material costs add

downside pressuredownside pressure

Aids Cement intensity Aids Cement intensity gainsgains

100

130

160

190

220

Billions1996$

95 97 99 01 03 05 06 07 08 09

Year

2005 3%

2006 12%

2007 8%

2008 4%

070605

35

33

31

29

27

25

Office ConstructionBillions 1996$ - 3 Month Moving Average

070605

48

45

42

39

36

Commercial ConstructionBillions 1996$ - 3 Month Moving Average

Nonresidential Investment Trends

070605

15

13

11

9

7

5

Lodging ConstructionBillions 1996$ - 3 Month Moving Average

070605

18

16

14

12

Health Care ConstructionBillions 1996$ - 3 Month Moving Average

Nonresidential Construction

20042004 20052005 20062006 2007 2008 2007 2008

IndustrialIndustrial 2%2% 23%23% 16%16% 12%12% 8%8%OfficeOffice 2%2% 4%4% 9%9% 9%9% 5%5%LodgingLodging 11%11% 1% 1% 46%46% 11%11% 5%5%Health CareHealth Care -5%-5% 2%2% 20% 20% 5%5% 1%1%ReligiousReligious -12%-12% -10%-10% 0%0% 4%4% 6%6%EducationalEducational -13%-13% -5%-5% 3%3% 2%2% 4%4%RetailRetail 1%1% 2%2% 7%7% 6%6% 2%2%

Public Construction

120

140

160

180

200

220

Billions1996$

93 95 97 99 01 03 05 07 09

Year

2005 0.0%

2006 5.7%

2007 3.7%

2008 3.9%

Improving State Fiscal Improving State Fiscal PicturePicture

Release of Pent-Up, Release of Pent-Up, Postponed ProjectsPostponed Projects

Infusion of SAFETEA Infusion of SAFETEA ($286Billion)($286Billion)

Public Construction

93% of public 93% of public construction performed construction performed at state/local levelat state/local level

Surpluses will re-emerge Surpluses will re-emerge

State/Local fiscal State/Local fiscal problems fadingproblems fading

Revenue growth Revenue growth improves with economy improves with economy and job growthand job growth

Highway Bill adds Highway Bill adds

strengthstrength -80

-40

0

40

80

$Billion

89 91 93 95 97 99 01 03 05 07

State & Local Government Surplus

MARI

NH

State Deficit Estimates FY 2005

0-9% 20-29% 30-39%

Pacific

MountainWest North Central

East North Central

SouthAtlantic

East South

Central

District of Columbia

West South Central

NewEngland

Middle Atlantic

10-19%

Deficit as percentage of budget

$0

$0

$0

$0

$.3

$1.1

$.17

$15

$0

$2

$.5

$.34

$.71

$.19

$.0

$.6

$.62

$.17

$.9

$0

$5.1

$5

$.14

$0$1.5$.19

$.74

NJ$.2CT

MD$.93

$.8

Secondary Source: National Association of Budget Officers

Dollar figures, in billions, indicate amount states had to save to balance 2005 budget.

KEY

No availabledata

DE $0

$0

$.9

$0

$.6$.2

$.9

$0

$.21

$0

$0

$0

$.3

$0

$.5

$0

$0

VT $0

$.12

$0

Primary Source: Center on Budget Policy and Priorities Feb / 04

070605

50

45

40

35

Highway and Street ConstructionBillions 1996$ - 3 Month Moving Average

070605

180

175

170

165

160

155

Public ConstructionBillions 1996$ - 3 Month Moving Average

070605

85

80

75

70

65

Public Building ConstructionBillions 1996$ - 3 Month Moving Average

Public Investment Trends

Public Construction

20042004 20052005 20062006 2007 2008 2007 2008

BuildingsBuildings -4%-4% -2% -2% 3%3% 3%3% 4%4%HighwayHighway -5%-5% 2%2% 10% 10% 6%6% 5%5%SewerSewer -4%-4% 2%2% 12%12% 4%4% 5%5%WaterWater -10%-10% 0%0% 6%6% 4%4% 4%4%

U.S. Construction Outlook

500

600

700

800

900

Billions1996$

93 95 97 99 01 03 05 06 07 08 09

Year

2005 4.3%

2006 0.5%

2007 -1.8%

2008 1.2%

2009 2.9%

Construction Conclusions

Residential Soft LandingResidential Soft Landing Mortgage Rate Increases SubduedMortgage Rate Increases Subdued Affordability ImprovesAffordability Improves

Nonresidential Recovery UnderwayNonresidential Recovery Underway

Turning Points Already AchievedTurning Points Already Achieved Recovery within Sectors Differ Recovery within Sectors Differ Still Weak from a Historical PerspectiveStill Weak from a Historical Perspective

Public Spending Potential StrongPublic Spending Potential Strong State Fiscal RecoveryState Fiscal Recovery Pent-up DemandPent-up Demand SAFETEASAFETEA

U.S. Cement Demand

Portland Cement Consumption

-20

-10

0

10

20

30

Year-Year

% Change

02 03 04 05 06 07

Harsh Winter

Mild Winter

Mild Winter

Cement Intensity Increases

Favorable Relative Price ConditionsFavorable Relative Price Conditions Concrete prices relative to steel/asphalt Concrete prices relative to steel/asphalt Material substitution in designMaterial substitution in design

Cyclical RecoveryCyclical Recovery Larger, more cement intensive projects Larger, more cement intensive projects

typically associated with economic recoverytypically associated with economic recovery

Construction MixConstruction Mix Outlook favors nonresidential and public Outlook favors nonresidential and public

construction with typically higher cement construction with typically higher cement intensityintensity

Code Changes/Green BuildingCode Changes/Green Building Fiscal Healing in Public SectorFiscal Healing in Public Sector

Portland Cement Consumption

60

70

80

90

100

110

120

130

140

MillionMetric Tons

89 91 93 95 97 99 01 03 05 07 09

Year

2005 5.6%

2006 0.3%

2007 0.3%

2008 2.9%

U.S. Cement Supply

Residential Exposure

Residential Cement Consumption as % of Total State Cement Consumption

1 DELAWARE 68.0%

2 MAINE 67.7%

3 FLORIDA 64.0%

4 NEW HAMPSHIRE 63.3%

5 IDAHO 46.6%

6 NORTH CAROLINA 46.0%

7 VERMONT 45.9%

8 NEW JERSEY 45.8%

9 N. CALIFORNIA 45.3%

10 HAWAII 44.7%

NATIONAL 37.8%

No Shortage Tight Supplies

Cement Supply - Summer 2005

Spot Tight Supplies

No Shortage Tight Supplies

Cement Supply - Summer 2006

Spot Tight Supplies

Competitive Materials Indexes

Blended Cement Consumption

1.0

1.5

2.0

2.5

3.0

3.5

MillionMetric Tons

98 99 00 01 02 03 04 05 06

Cement Inventories

2

4

6

8

10

MillionMetric Tons

94 96 98 00 02 04

Source: U.S.G.S.

05

15

25

35

45

$/TonAsia-Gulf

10

20

30

40

50

60

01 02 03 04 05 06

Imports

Freight Rates

Metric TonsSAAR

Market Tightening

Import Mix Shifting

5.3%Mexico

20.9%Latin America

19.7%Europe

21.1%Canada

29.5%Asia

2004

3.6%Other

6.5%

17.4%

18.5%

16.0%

36.0%

2005

5.5%

6.3%

11.1%

13.0%

13.1%

55.3%

2006

1.2%

U.S. Cement & Clinker Imports(Percent Change)

November 2006 YTD

Great Lakes

SouthAtlantic

District of Columbia

NewEngland

Middle Atlantic

-19%

9%

1%19%

17%

15%

- 11%

- 38%

Florida

California

NorthwestCanadian Border

Gulf Coast

Mexican Border

5%

U.S. 8%

3%

Cement and Clinker Imports

0

10

20

30

40

50

MillionMetric Tons

89 91 93 95 97 99 01 03 05 07 09

Year

2005 33.6

2006 35.9

2007 34.5

2008 32.1

06

Announced Capacity Increases(Million Metric Tons)

-1

0

1

2

3

4

5

6

7

8

96 98 00 02 04 05 06 07 08 09 10

Net Expansion 2006-2010

22.5 MMT

$5.0 Billion

Outlook Summary

Slowing Economic GrowthSlowing Economic Growth Labor Markets – Consumer – InvestmentLabor Markets – Consumer – Investment

Construction Market Flattening Construction Market Flattening Residential Begins Recovery Moving Toward 2008 Residential Begins Recovery Moving Toward 2008 Continued Upside Contribution from Nonresidential & Continued Upside Contribution from Nonresidential &

Public Public

CementCement

Demand Flat This YearDemand Flat This Year Utilization on Par with 2006 (94%)Utilization on Par with 2006 (94%) Inventories Return to Average (19 Days Supply)Inventories Return to Average (19 Days Supply) Imports RetighteningImports Retightening Significant Domestic Expansion 2008-2010Significant Domestic Expansion 2008-2010

U.S. Construction & Cement Outlook

Construction & Building Materials Conference

March 9, 2007

David E. Czechowski

Manager, Sr. Economist

Economic Research

Portland Cement Association

Merci