ONTARIO CEMENT MARKET

OVERVIEW

ECONOMIC GROWTH, CONSTRUCTION & CEMENT DEMAND

May, 2016

Petrus Group

Contents

1. Overview & Scope ................................................................................................................................ 2

2. Ontario Economic Trends ..................................................................................................................... 2

a. Population Trend .............................................................................................................................. 2

b. GDP ................................................................................................................................................... 3

c. Construction Spend........................................................................................................................... 4

d. Housing Starts ................................................................................................................................... 4

e. Interest Rate...................................................................................................................................... 5

3. Ontario Cement Forecast ..................................................................................................................... 6

a. Cement Demand ............................................................................................................................... 6

b. Cement Intensity ............................................................................................................................... 6

4. US Target Market Economic Trends.................................................................................................. 7

a. GDP ................................................................................................................................................... 7

b. Construction Spending ...................................................................................................................... 8

c. Residential Starts .............................................................................................................................. 8

d. USD-CAD Exchange Rate ................................................................................................................... 9

e. US Exports ......................................................................................................................................... 9

5. US Export Market - Cement Forecast .................................................................................................. 9

a. Cement Demand ............................................................................................................................. 10

b. Cement Intensity ............................................................................................................................. 10

6. Conclusion .......................................................................................................................................... 11

Appendix ..................................................................................................................................................... 12

1. Canada - GDP .................................................................................................................................. 12

2. Canada - Construction Spend.......................................................................................................... 12

3. Canada - Housing Starts .................................................................................................................. 13

4. Canada - Cement Demand .............................................................................................................. 13

1
 1. Overview & Scope
This report will provide an overview of the current state of the cement industry in Ontario, Canada and
provide an outlook for the industry in the near future. Both historical and future economic drivers will
be examined to provide an analysis. The cement markets and key economic drivers in the US states of
Vermont, New York, Pennsylvania, Ohio and Michigan is considered, since ~30% of the cement produced
in Ontario is exported to these markets. The Cement Industry uses various public economic indicators
that include but are not limited to construction spending, total construction spending and housing starts
including interest rate trends. The most important indicator is population growth as this is directly
correlated with cement demand. These factors will be reviewed and future trends will be analyzed to
provide an option on economic outlook of the cement industry in the near future.

2. Ontario Economic Trends

The next 5 year outlook for the Ontario economy looks positive after a slow recovery post the 2008-09
crisis. The growth will be driven by increase in household spending, increased exports to the US driven
mainly by the lower Canadian dollar, infrastructure spending and lower oil prices, Ontario being a net
importer of oil. This is a contrast from the previous 5 year period, where oil prices were high and strong
Canadian dollar made cement exports less competitive. During the same time period the US economy
especially in the states south of the Great Lakes was coming out of recession and construction demand
was adversely affected. One key measure for the cement industry is per capita cement consumption.
!s a regions population increases or declines, there is a direct effect on cement consumption.

a. Population Trend1
Population (Million)
45 41.0 42.6
39.4
40 35.9 37.6
34.0
35 30.7 32.2
30
25
20 15.1 15.7 16.3
13.1 13.8 14.4
15 11.7 12.5
10
5
0
2000 2005 2010 2015 2020 2025 2030 2035

Ontario Canada

CAGR (%) Canada Ontario

2005-2015 1.1% 1.0%
2015-2020 1.0% 0.9%
2015-2025 0.9% 0.9%
2015-2030 0.9% 0.9%

1
Population data is from Statistics Canada website

2
The population in Ontario has grown steadily over the past 10 years at an average annual rate of 1%
which is in line with the national growth rate, and will continue see similar growth rate in the next 15
years. Ontario has 38% of the Canadian population and this share is expected to remain the same in the
next 20 years. The statistics do not take into consideration the resettlement of immigrants to the
Greater Toronto Area. It is seen that even after arriving and settling in different parts of the country,
immigrants tend to resettle in the Toronto area after some time. This trend has resulted in growing
demand for residential property, increased consumer spending and business activity in the region and is
expected to continue over the next several years.

b. GDP2
Ontario GDP
800,000 8%
6.0%
700,000 6%
600,000
2.6% 2.6% 2.7% 2.1% 3.1% 2.6% 4%
500,000 2.5% 2.5% 2.3% 2.6% 2.1% 2.1% 2.2%
1.5% 1.7% 1.5% 1.4% 1.2%
400,000 2%
-0.3%
300,000 0%
200,000
-3.3% -2%
100,000
0 -4%

GDP - Chained (2007) Million dollars % Change

The Ontario GDP has grown at a yearly average of 1.6% for the past 15 years which is in line with the
national average of 1.9%. There has been steady recovery in the economy post the 2008-09 crisis and
the current GDP levels are higher than the pre-crisis levels. In the next 5 years the Ontario GDP is
expected to grow at an annual average of 2.3% which is higher than the national average of 2.1%. This
growth is mainly driven by exports to the US, higher consumer spending and infrastructure spending.

2
GDP historical data is from Statistics Canada and forecast data is from RBC Economic forecast Report March
2016 and CAC Market Intelligence report spring 2016

3
 c. Construction Spend3
Construction Spend (2007 Chained $M)
120,000

100,000

80,000

60,000

40,000

20,000

The construction spending in Ontario has grown at a rate of 3.8% on an annual basis for the past 15 year
and expected to grow at a rate of 2.6% in the next 5 years. This is higher than the national average
growth rate of 1.7%. This growth is mainly driven by the spending in the non-residential segment (CAGR
4.1%) followed by moderate growth in residential (2.1%) and government segment (2.2%). Currently
Ontario accounts for 31% of the total national construction spend and this number is expected to
continue to grow over the next several years. Construction spending is correlated to population growth.

d. Housing Starts4
Ontario - Housing Starts
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Single-detached Multiples

Housing starts have increased since the 2008-09 crisis and growing moderately but still below the pre-
crisis levels. It is expected to pick-up speed in the next 3-5 years horizon driven by increase in
employment opportunities, investments in manufacturing, growth in exports and lower energy prices.
3
2012-2013 Construction spend numbers from CAC Market Intelligence report spring 2016. 2000-2011
construction spend numbers are from PCA 2013 Yearbook
4
Housing Starts historical data is from Statistics Canada (sourced from CMHC) and forecast data is from CMHC
fourth quarter report

4
There is a shift in larger urban areas such as Toronto, Vaughan, Kitchener and Ottawa to multifamily
developments. This type of housing has higher intensity of cement use as compared to single family
housing.

e. Interest Rate5
Bank of Canada Overnight Lending Rate
7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

The interest rate environment has been at historical lows post the financial crisis in 2008-09, which has
stimulated business investments and growth in residential construction spending. The interest rates are
expected to increase over time, as there are strong signs of economic recovery, but the upward trend
will be at a much slower pace.

5
Bloomberg

5
 3. Ontario Cement Forecast
a. Cement Demand6
Ontario Cement Demand (MillionMT)
4.0 3.7
3.4 3.4 3.5 3.6
3.3 3.3 3.4 3.3 3.3 3.4
3.5 3.1 3.1 3.1 3.1
3.1 3.0
2.9 3.0 3.0 2.8
3.0
2.5
2.0
1.5
1.0
0.5
-

Cement demand in Ontario has picked up since the economic downturn in 2008-09 and close to the pre-
crisis level. Cement demand has grown moderately at an annual average of 0.5% in the past 15 years
and expected to grow at an annual rate of 3.4% in the next 5 years which is higher compared to the
national average of 1.8%. The growth is mainly driven by increase in the non-residential construction
spending and exports to the US.

b. Cement Intensity
Ontario Cement Per Capita (KG)
300
264 265 264 270 262
248 248 246 256 246 241 244 247 251
256
250 233 227 227 227 225
215
200

150

100

50

Cement per capita is still lower compared to the pre-crisis levels of 2008-09 and expected to slowly pick-
up and get to historical levels in the next 5 years. The overall consumption is reflective of a mature
market with levels less than 300kg/person. However, as the rebuilding of infrastructure and constant
influx of immigrants to the province, the per capita consumption is expected to remain constant.

6
2009-2020F Cement demand numbers are from CAC Market Intelligence spring 2016 report. 2000-2008 is from
PCA 2013 year book

6
 4. US Target Market7 Economic Trends

The US has a significant effect on the Ontario cement industry. Over 30% of production is exported to
the Great Lakes based States. The close proximity to water transport allows for competitive exports
from Ontario to the bordering US States. The Ontario cement manufacturers product meets the !STM
and ASTHTO specifications required by the various Department of Transportation. The economic activity
coupled with the exchange rate during the last few years, slowed exports of product. However with
both factors improving, exports are anticipated to increase in subsequent years.

a. GDP8
3,500,000 3.2% 4%
2.5% 3%
2.2% 2.1% 2.2% 2.1% 2.1%
3,000,000 1.9% 1.9% 1.8% 1.8%
1.6% 1.6%
1.2% 1.2% 1.3% 2%
2,500,000 1%
0.5%
2,000,000 0%

-1%
1,500,000 -1.8%
-2.6% -2%

1,000,000 -3%

GDP ($2009, Millions) % Change

The GDP in the US target market has grown at an average rate of 1.2% for the past 15 years and
expected to grow at a rate of 1.9% in the next 5 years which is in line with the US national growth rate of
2.2%. The economy has recovered slowly from the downturn of 2008-09 and expected to pick up speed
in the next 5 years.

7
US states of New Hampshire, New York, Pennsylvania, Ohio and Michigan which is the primary target market for
Ontario cement exports
8
US GDP data is from PCA Winter 2015-16 State Forecasts

7
 b. Construction Spending9
Total Construction Spending (Million $ 2009)
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-

Residential Construction Spending Commercial Construction Spending Public Construction Spending

The construction spending in the identified States, dropped by annual rate 2.1% in the last 15 years
driven mainly by public construction spending (-3.4%). But the trend has reversed in 2015 and expected
to grow at a rate of 4.3% in the next 5 years driven mainly by public spending (6.9%) followed by
residential segment (3.8%) and commercial segment (2.5%). The spending is expected to get to the pre-
financial crisis levels in the next 5 years.

c. Residential Starts10
Residential Permits
250,000

200,000

150,000

100,000

50,000

Single Family Permits Multi Family Permits

Housing starts has picked up from the lows of 2008-09 and has grown at an annual rate of 15.5% but still
below the pre-crisis highs. The growth has been mainly driven by multi-family residential segment which
grew at a rate of 34.7% annually. In the next 5 years the housing starts are expected to grow at a rate of
4.4% annually mainly driven by single-family segment (14.7%).

9
US Construction Spending is from PCA Winter 2015-16 State Forecasts
10
US Residential Starts is from PCA Winter 2015-16 State Forecasts

8
 d. USD-CAD Exchange Rate11
USD/CAD
1.80
1.57
1.60 1.48 1.48
1.36 1.36 1.31 1.34
1.40
1.13 1.10
1.20 1.07 1.03 1.00
1.00
0.80
0.60
0.40
0.20
0.00
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

The Canadian dollar has depreciated against the US dollar and is currently close to the historic lows
which have made the goods manufactured in Canada competitive in the US market. This has fueled the
growth of exports into the US markets.

e. US Exports12
Exports (Million $)
600,000

500,000

400,000

300,000

200,000

100,000

-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Canada United States

Exports from Canada have grown at an annual rate of 5.4% for the past 5 years and exports to US have
grown at the rate of 6.1%. The exports in 2015 have surpassed the pre-crisis levels. US accounts for 76%
of the total exports out of Canada.

5. US Export Market - Cement Forecast

11
USD-CAD historical exchange data is from IMF database
12
Exports data are from Statistics Canada website. The data set is for total Canada exports and total exports from
Canada to US

9
 a. Cement Demand13
Total Portland Cement (Million MT)
16.0
13.6 14.0
13.5 13.2 13.0
14.0 12.8
12.1 11.7 12.2 12.6
12.0 10.7 10.8 11.2
10.3
9.3 9.6
10.0 8.8 9.0
8.4
8.0
6.0
4.0
2.0
0.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F2018F2019F2020F

Cement demand in the US target market has grown steadily post 2008-09 and is expected to reach the
pre-crisis level in the next 5 years. The demand had grown at an annual rate of 4.2% in the last 5 years
and is expected to continue a similar trend with an annual rate of 3.7% in the next 5 years. The growth is
mainly driven by uptick in the general economic environment and increased spending in the residential
segment and public infrastructure.

b. Cement Intensity14
Cement Intensity (MT/Mil$2009)
100.0 89.8 86.6 86.5 90.8
90.0 82.5 85.2 86.0 84.1 83.4 84.1 84.0 83.8
80.3 78.4 81.3
76.1 77.3
80.0
67.2 69.6
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

There has been a rapid growth in the intensity of cement consumption post 2008-09 and it is already
above the pre-crisis highs. This is a key reason for growth in the cement demand even though the
construction spending grew moderately post 2008-09. The current levels of cement intensity are
expected to remain stable for the next 5 years.

13
US Cement Demand data is from PCA Winter 2015-16 State Forecasts
14
US Cement Intensity data is from PCA Winter 2015-16 State Forecasts

10
 6. Conclusion
The next 5 year outlook for the Ontario produced cement remains very positive mainly driven by

i. Moderate to high economic growth in Ontario driven by improvement in the general business
environment, increased consumer spending, lower unemployment rate, population growth, and
increased construction spending mainly on the infrastructure segment and in the residential
segment
ii. The cement exports to the neighboring US states are expected to be strong due to general
upbeat in the macro-economic conditions in the target US states driven mainly by construction
spending (public segment and residential segment).
iii. The US/CAD exchange rate is back to historical rates, making cement exports from Ontario to
the US competitive to alternatives.

11
Appendix
1. Canada - GDP15
Canada GDP
5.3%
2,000,000 6%
3.1% 3.0% 2.8% 3.2%3.2% 4%
1,500,000 2.6% 2.5% 2.3% 2.2% 2.1%2.1%
2.1% 2.1% 1.9% 2.1% 1.7%
1.5% 1.2%
0.8% 2%
1,000,000
0%
500,000 -3.1% -2%

0 -4%

GDP - Chained (2007) Million dollars % Change

CAGR (%) Canada

2000-2015 1.9%
2015-2020 2.1%
2. Canada - Construction Spend16
Construction Spend (2007 Chained $M)
350,000

300,000

250,000

200,000

150,000

100,000

50,000

CAGR (%) Canada

2000-2015 3.7%

2015-2020 1.7%

15
GDP historical data is from Statistics Canada and forecast data is from RBC Economic forecast Report March
2016 and CAC Market Intelligence report spring 2016
16
2012-2013 Construction spend numbers from CAC Market Intelligence report spring 2016. 2000-2011
construction spend numbers are from PCA 2013 Yearbook

12
 3. Canada - Housing Starts17
Canada - Housing Starts
250000

200000

150000

100000

50000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F
Single-detached Multiples

4. Canada - Cement Demand18

Canada Cement Demand (MillionMT)
12
9.4 9.6 9.8 9.6 9.5 9.5 9.6
10 9.3 8.9 9.3 9.2 9.1 9.3
8.9 8.8 8.8 8.9
8.3 8.4 8.5
8.0
8

CAGR (%) Canada

2000-2015 0.4%

2015-2020 1.8%

17
Housing Starts historical data is from Statistics Canada (sourced from CMHC) and forecast data is from CMHC
fourth quarter report
18
2009-2020F Cement demand numbers are from CAC Market Intelligence spring 2016 report. 2000-2008 is from
PCA 2013 year book

13