Ontario Cement Market Overview - MPAC

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 region’s population increases or declines, there is a direct effect on cement consumption.

a. Population Trend1

11.7 12.5 13.1 13.8 14.4 15.1 15.7 16.3

30.7 32.2 34.0

35.9 37.6 39.4 41.0 42.6

0

5

10

15

20

25

30

35

40

45

2000 2005 2010 2015 2020 2025 2030 2035

Population (Million)

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

6.0%

1.5% 2.6%

1.7% 2.6% 2.7%

2.1% 1.5%

-0.3%

-3.3%

3.1% 2.6% 1.4% 1.2%

2.5% 2.5% 2.3% 2.6% 2.1% 2.1% 2.2%

-4%

-2%

0%

2%

4%

6%

8%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Ontario GDP

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

0

20,000

40,000

60,000

80,000

100,000

120,000

Construction Spend (2007 Chained $M)

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

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Ontario - Housing Starts

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

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Bank of Canada Overnight Lending Rate

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

2.9 3.0 3.0 3.1

3.3 3.3 3.4 3.4 3.4

2.8 3.1 3.0

3.3 3.1 3.1 3.1

3.3 3.4 3.5 3.6 3.7

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Ontario Cement Demand (MillionMT)

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

248 248 246 256 264 265 264 270 262

215 233 227

246 227 227 225

241 244 247 251 256

-

50

100

150

200

250

300

Ontario Cement Per Capita (KG)

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 manufacturer’s 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

1.2% 1.2%

2.2% 2.5%

1.3%

0.5%

-2.6% -1.8%

3.2%

1.6% 2.1%

1.6%

2.2% 2.1% 2.1% 1.9% 1.9% 1.8% 1.8%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

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

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Total Construction Spending (Million $ 2009)

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

-

50,000

100,000

150,000

200,000

250,000 Residential Permits

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

1.36 1.36 1.48 1.48

1.57

1.31

1.13 1.07 1.03 1.00

1.10

1.34

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

USD/CAD

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

-

100,000

200,000

300,000

400,000

500,000

600,000

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

Exports (Million $)

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

Total Portland Cement (Million MT)

16.0 14.013.6 13.5 13.2 13.014.0 12.8 12.612.1 12.211.711.212.0 10.7 10.8

10.3 9.69.39.010.0 8.88.4

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

a. Cement Demand13

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 90.8 86.6 86.5 85.2 86.0 84.1 83.4 84.1 84.0 83.890.0 82.5 81.380.3 78.4 77.376.1

80.0 69.667.2 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

5.3%

1.5%

2.6%2.1%

3.1%3.0%2.8% 2.1%

0.8%

-3.1%

3.2%3.2%

1.9%2.1%2.5%

1.2%1.7%

2.3%2.2%2.1%2.1%

-4%

-2%

0%

2%

4%

6%

0

500,000

1,000,000

1,500,000

2,000,000

Canada GDP

GDP - Chained (2007) Million dollars % Change

CAGR (%) Canada

2000-2015 3.7%

2015-2020 1.7%

CAGR (%) Canada

2000-2015 1.9%

2015-2020 2.1%

2. Canada - Construction Spend16

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

Construction Spend (2007 Chained $M)

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

0

50000

100000

150000

200000

250000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F

Canada - Housing Starts

Single-detached Multiples

4. Canada - Cement Demand18

8.3 8.4 8.5 8.9

9.3 9.4 9.6 9.8 9.6

8.0 8.8 8.9

9.5 9.3 9.2 8.8 8.9 9.1 9.3 9.5 9.6

0

2

4

6

8

10

12

Canada Cement Demand (MillionMT)

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