Portland Cement Association Report

PCA believes the combination of sustained high asphalt prices, challenging budgetary pressures, as well as the need to improve and expand highway infrastructure have created extremely favorable conditions for significant increases in concrete highway paving.

PCA?EUR??,,??s current forecast suggests a severe decline in cement demand this year followed by a slightly milder decline next year. The deepening U.S. recession, global commodity and energy price weakness, and a less than confident consumer are offering more than enough recessionary drag on all provincial economies. If there is any spot of optimism in the forecast, it lies with government spending and the strategy of translating infrastructure spending in economic growth.

Paving activity has declined for seven consecutive months. By itself, the 2009 American Recovery and Reinvestment Act (ARRA) is expected to significantly increase paving activity. Due to administrative lags, however, stimulus spending is not expected to have any great impact on paving activity until fiscal 2010. This stimulus, however, must be viewed in the context of difficult fiscal budgetary pressures currently facing state governments. Weak labor market conditions directly translate into reduced state revenue (income and sales tax declines) as well as increases in entitlement spending in the form of unemployment insurance.

The economic downturn has hit the cement industry hard, resulting in a 45 million metric ton decline in volume ?EUR??,,?? the largest in history. Utilization rates are low, inventories are well above desired levels and some plants have been temporarily shut down. These adverse conditions are supplemented by the cement industry?EUR??,,??s dramatic $7.3 billion capacity expansion. During 2006-2013, the cement industry will add 25 million metric tons of new clinker capacity ?EUR??,,?? or roughly 27 million metric tons of cement capacity (allowing for gypsum and limestone additions). This investment will increase domestic capacity by more than 25% and dramatically reduce the industry?EUR??,,??s dependence on imports.

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Modest increases in oil prices from current levels are expected to prevail through mid-2010. Once stronger world economic growth returns, PCA expects oil prices will eventually return to 2008 levels.

The purpose of this Flash Report is to provide specifiers accurate information about the implications of sustained high oil prices on initial bid and life cycle paving costs and to assess the potential upside risk to PCA cement consumption projections.

Economic distress has resulted in significant fiscal difficulties facing state and local governments. As a consequence, a decline in paving activity has materialized ?EUR??,,?? reducing regional shortages. It is likely that once the economic recovery gains traction, large shortages may reappear, oil prices will rise and asphalt prices will resume their upward climb.

Huge deficits have materialized in 47 states. Faced with the choice of funding entitlement and education programs or road paving, states have reduced spending on paving. PCA expects discretionary spending on road paving will continue to contract as long as large deficits remain. This scenario is not expected to improve until a sustained period of significant job growth materializes. Unfortunately, this process will not begin until the second half of 2010.

Oil prices are highly volatile. While they have declined as the global economy weakened, West Texas Intermediate (WTI) oil has remained very high compared to historical standards ?EUR??,,?? even in the face of the current economic slowdown. Modest increases in oil prices from current levels are expected to prevail through mid-2010. Once stronger world economic growth returns, PCA expects oil prices will eventually return to 2008 levels.