Conditions surrounding cement consumption are temporarily weak; there's no denying that fact. Sustained growth in cement consumption typically materializes only when all three sectors of construction (residential, nonresidential, and public) are growing. If any one sector is in decline, cement consumption typically pauses or declines. This is the condition currently. This is the simply stated opinion of Portland Cement Association's Chief Economist Ed Sullivan, who sees the residential sector as currently in a correction due to past practices of easy credit conditions, lending and borrowing practices based on questionable assessments of risk, and the withdrawal of speculators.

The decline in residential construction is temporary, Sullivan states in the PCA's Summer 2007 U.S. Cement & Construction Forecast. For many regions, the correction process will start in earnest in a year — some regions may have to wait longer. Nonresidential and public construction is expected to record sustained gains throughout the forecast horizon. PCA expects all regional markets will be characterized by growth in all three construction sectors in 2009 — perhaps marking the onset of a sustained period of growth in cement consumption.

Burdened by a hard correction in the housing market, cement consumption has weakened. Through the first five months of 2007, year-to-date cement consumption is off 12.9%, compared to 2006 levels. PCA believes slow home sales and increases in home foreclosures will prevent significant improvement in new home inventories. High inventories will prevent any significant near-term improvement in housing starts until the second half of 2008. Housing markets that fully participated in the housing boom and attracted a large amount of speculators will probably not improve until early 2009. As a result, PCA expects the housing sector will continue to be a drag on overall cement consumption growth during 2007 and to a lesser extent during 2008. PCA expects the sub-prime issue will leak beyond the housing market and adversely impact consumer spending — to the detriment of overall economic growth. Slower economic growth, in turn, is expected to lower the expected return on investment for nonresidential buildings — taking some of the double-digit growth momentum out of this construction segment in late 2007 and 2008.

Despite the challenges that lie ahead for the economy, a recession is not anticipated. Fundamentally, the economy is currently strong and characterized by relatively low unemployment, strong gains in job creation, slowly subsiding inflation, and low interest rates.

While slower economic growth lies ahead — the economy is expected to expand. This suggests that the fundamentals affecting nonresidential construction and public construction will continue to improve — although at a more moderate rate than previously anticipated. All totaled, PCA expects cement consumption will decline 4.4% in 2007. The housing drag on cement consumption is expected to moderate in 2008. This, coupled with sustained growth in nonresidential and public construction, translates into a 2.2% gain in 2008 cement consumption. While growth in cement consumption is expected to return next year, 2008 levels will remain well below the past cyclical peak reached in 2005.

CONSTRUCTION OUTLOOK

The United States' construction market is currently characterized by strong nonresidential and public activity offset by weak residential conditions. Unfortunately, the weakness in residential has more than offset the market's other strengths and led to a decline in overall construction. These conditions are expected to persist throughout 2007 resulting in a 3.5% decline in real put-in-place construction spending. Modest growth is expected to materialize in 2008.

Residential Construction

The duration and magnitude of the decline in overall construction will be largely determined by activity in the residential sector. Unfortunately, the single-family housing market has not yet stabilized. In fact, single-family sales remain sluggish. Despite large cutbacks in single-family building activity, inventory conditions have not improved. Inventory of homes for sale is now more than eight months of supply and are likely to increase further in the months ahead due to continued softness, increases in home foreclosures, and seasonal increases in inventory from existing homes.

Home prices are declining and now stand 2.7% below year-ago levels on a national basis. Year-to-date, single-family starts are off nearly 30% compared to 2006 levels. In addition, the weakness in single-family starts will likely extend deeper into 2008 than previously expected. Inventory conditions are not expected to improve as quickly as previously expected. Single-family inventories now stand at 4.1 million homes. Despite a 29% year-to-date reduction in single-family starts activity, inventories are roughly 640,000 units above year-ago levels. While single family start activity has declined significantly, sales have also — diminishing the ability of homebuilders to improve inventories.

Existing home inventories will play an important role in the inventory correction process. Currently, nearly 87% of total home inventory is comprised of existing homes. During February through June, a bulge of existing homes is introduced for entry into the spring/summer selling season — adding to inventory on the market. This implies little near-term improvement in the number of homes on the market for sale. In addition to this seasonal phenomenon, foreclosure activity has increased significantly — adding even further to inventories. During 2006, roughly 400,000 homes went into foreclosure.

Given the subprime woes and tighter lending standards, PCA expects foreclosures to double during 2007. Although monthly data is highly volatile, PCA does not expect an improvement in inventory conditions to materialize until late in the third quarter or early in the fourth quarter of 2007. Even then, the improvement most likely will be modest.

Nonresidential and Public Construction

The recession of 2001 prompted a 30% peak (2000) to trough (2005) decline in nonresidential construction. Nonresidential construction has since recorded double-digit gains for 12 straight months. These large-percentage gains, however, are calculated off a low base. Keep in mind, despite the impressive growth in nonresidential construction, current levels are 13% below past cyclical peak levels.

PCA expects nonresidential construction spending will grow 11.6% during 2007 (compared to 8.6% projected in the spring forecast). Sustained economic growth has led to an improvement in capacity utilization, vacancy rates, and leasing rates. As a result, the expected ROI on nonresidential property investments has increased dramatically. Strong corporate earnings and a relatively favorable borrowing environment have provided ample funds for investment. Finally, some sectors of nonresidential construction lag housing. As a result, nonresidential construction is finding some fuel from the past housing boom. Combined, these conditions have formed the basis for the current strong nonresidential construction environment. PCA expects the growth rate for nonresidential construction to moderate during 2008.

Several factors account for this assessment. First, nonresidential construction activity will be compared against strong 2007 levels. Second, the expected slowdown in economic growth will result in a lowering of expected ROI on commercial construction. Third, there remains the possibility that the tightening in lending standards and re-assessment of lending risks that is ongoing in the mortgage industry may spill over to commercial lending — resulting in a mild tightening in liquidity. PCA expects nonresidential construction will grow by less than 4% during 2008.

Public construction is also outperforming PCA expectations with year-to-date spending up 8.9%. The gains in public spending are broad based and include every sector within the public category. The larger sectors within the public category are performing quite well with highway up 9.8% year-to-date and public buildings up 9.2%. The strong performance in public construction is a reflection of strong revenue gains at the state level. This, in turn reflects strong job creation — for every net new job created, one net new taxpayer is created. During 2006, 2.8 million net new jobs were created, enhancing the revenue conditions facing states. Given lags, this revenue increase is at least in part showing up as increased public construction spending. PCA expects public construction will grow 5.7% during 2007.

Slower economic growth and job creation, competing social service expenditures, and uncertainty surrounding the solvency of the highway trust fund all suggest that public construction activity will grow at a more muted pace in the out years of the forecast — reflected in an average annual growth rate of 2.5% during 2009-2011.

CEMENT OUTLOOK

Changes in cement consumption are dictated by changes in construction activity and changes in cement intensity. Construction spending is expected to decline 3.5% during 2007 and grow 1.1% in 2008.

Cement intensity measures the amount of cement used per real dollar of construction activity. PCA's spring forecast expected gains in cement intensity would partially cushion cement consumption from declines in construction activity. The gains in intensity were expected to materialize during the second half of 2007 and extend into 2008. Unfortunately, cement intensity has declined ten straight months and is off nearly 12% from 2006 levels.

Many factors impact changes in cement intensity. Key influencers are: changes in the composition of construction, changes in the regional composition of cement demand, and changes in the competitive price position of concrete against competing materials. Recent compositional changes in construction and the relative price position of concrete versus competing building materials suggest that cement intensity should have increased in 2007. Weather conditions, soft construction activity in key cement consuming regions, and the increased use of supplementary cementious materials (SCMs, including slag and fly ash) may be the critical factors explaining the erosion in cement intensity. Regional conditions and SCM usage are not likely to change soon and may continue to depress a recovery in cement intensity. In addition, favorable relative price conditions may contain longer lags than contained in PCA's spring projections and suggest that gains from this area may not materialize until 2008. PCA now expects a modest decline (roughly 1%) in 2007 cement intensities.

Burdened by a hard correction in the housing market and the absence of growth in cement intensity, cement consumption is expected to decline 4.4% during 2007. The housing drag on cement consumption is expected to moderate in 2008. This, coupled with sustained growth in nonresidential and public construction and modest gains in intensity translates into a 2.2% gain in 2008 cement consumption. While growth in cement consumption is expected to return next year, 2008 levels will remain well below the past cyclical peak reached in 2005.

The expectation of weak 2007 market conditions, high freight rates and high year-end 2006 inventory levels has resulted in a decline in imports. In 2006, imports reached a record high of 35.5 million metric tons — roughly a 2 million metric ton increase over 2005 levels. This increase materialized in the context of a United States cement consumption contraction of nearly 700,000 metric tons. While a modest decline in domestic plants' utilization rates absorbed some of this excess, inventory levels increased to roughly 23 days supply by the end of 2006 (17 days supply reflects the historical average).

At the same time inventories were increasing, freight rates recorded sustained increases as well. Freight rates for Handymax ships from Asia to the Gulf now stand 100% higher compared to levels at the beginning of 2006. Freight rates for Handysize ships from Europe to the East Coast now stand 47% higher compared to levels at the beginning of 2006.

The combination of further expected weakness in United States' cement markets, high inventory levels, and high freight rates has resulted in a significant decline in imports levels thus far in 2007. Though March cement imports are off 38% compared to 2006 levels, PCA expects the current SAAR average of 28 million metric tons will be maintained during 2007 — reflecting a 22% decline in imports compared to 2006 levels. There is significant downside risk to this projection. A 28 million metric ton import level for 2007 suggests a 7.5 million-metric ton reduction in volume compared to 2006 levels. PCA's current projections for cement consumption translate into a 5.3 million-metric ton reduction in market volume. The dramatic decline in import volume suggests the potential of some inventory reduction may materialize during 2007 — despite weak market conditions.

PROJECTED U.S. POWDER CONSUMPTION (000 METRIC TONS)

	2005	2006	2007**	2008**	2008**
Total Cement Consumptio	127,997	127,218	121,585	124,035	128,756
Portland Cement	122,508	121,817	116,472	118,992	123,558
Masonry Cement	5,489	5,401	5,113	5,043	5,198
Portland Share of Total (%)	95.7%	95.8%	95.8%	95.9%	96.0%
Cement and Clinker Imports	33,652	35,895	28,153	28,715	25,348
Import Share of Total (%)	27.5%	29.5%	24.2%	24.1%	20.5%
Percent Change
Total Cement Consumption	5.6%	-0.6%	-4.4%	2.0%	3.8%
Portland Cement	5.5%	-0.6%	-4.4%	2.2%	3.8%
Masonry Cement	6.1%	-1.6%	-5.3%	-1.4%	3.1%
Cement and Clinker Imports	23.2%	6.7%	-21.6%	2.0%	-11.7%
Source: Portland Cement Association **estimated