Malaysian ire over rare-earth refinery threat to economic plan

Posted on June 5, 2011. Filed under: Pollution |

Bloomberg


IOL Business Pic NAJIBRAZAKBloomberg

Malaysian Prime Minister Datuk Seri Najib Tun Razak. Photo: Bloomberg.

On a sweltering Sunday in April, more than 300 people packed in to a room above GC Curry House, a popular eatery in Kuantan on Malaysia’s east coast. They discussed the potential hazards of a rare-earth refinery that Sydney-based Lynas is building about 25km away that will process radioactive ore into the exotic metals that go into tech gadgets, hybrid cars and weapon systems.

Member of Parliament Fuziah Salleh told residents that the Australian company got a 12-year tax break from Malaysia even as other countries would shun the plant – set to be the world’s largest rare-earth refinery – because of the health risks it posed. That information drew boos from the crowd.

An audience member, Chow Kok Chew, said he used to live near a rare-earth plant in western Malaysia run by a joint venture that included Japan’s Mitsubishi Chemical Holdings, and shut down in 1992. Carelessness by plant operators led to the radiation poisoning of local people’s livestock, he said.

Protesters have called on Prime Minister Najib Razak to block the refinery’s opening, Bloomberg Markets magazine reports.

In response, the government on April 22 announced an independent panel of experts would conduct a one-month safety review and hold up the plant’s pre-operating licence until it was complete. Still, Lynas said it expected to begin producing rare earths at the site on schedule in the third quarter.

The protests threaten to interfere with Najib’s efforts to show he is committed to an economic plan that seeks $444 billion (nearly R3 trillion) in private investment over nine years. He has to avoid angering voters who have environmental concerns. During the period when the plant got approvals for planning and construction, Najib was either deputy prime minister or, starting in April 2009, Malaysia’s premier.

And yet he must attract companies and industries that can help him meet his target for the next five years of 6 percent annual growth in gross domestic product (GDP).

Najib has promised voters he will more than double per-capita income to $15 000 in 2020 from $6 700 in 2009. The next elections must be called by early 2013.

In a March 29 interview, Najib said he would make sure the refinery was run safely. He also said Malaysia wanted to attract foreign firms to boost growth.

The refinery would create 350 highly skilled jobs and at least $1.7bn in annual exports, Lynas said. That is equivalent to about 1 percent of Malaysia’s GDP.

Malaysia certainly needed increased private investment, said Manu Bhaskaran, the Singapore-based head of economic research at Centennial, a consulting firm. Excessive government interference in the economy in the immediate aftermath of the Asian financial crisis drove businesses away, and while things were beginning to improve, there was ground to make up, he said.

The World Bank said in an April report the number of skilled Malaysians living abroad had tripled in two decades, with more than half of them living in Singapore.

Growth fell to an average of 4.6 percent a year in the decade that ended in 2010, down from a 7.2 percent annual average in the 1990s. While a rebound from the global recession helped the economy expand a healthy 7.2 percent last year, neighbouring Singapore grew twice as fast.

Before the financial turmoil in Asia in 1997 and 1998, economists dubbed Malaysia one of the next East Asian tigers, along with Indonesia, the Philippines and Thailand.

The country attracted manufacturers such as Intel and Seagate Technology. The capital boomed and could boast the tallest buildings in the world when the twin, 88-storey Petronas Towers opened in 1999.

In the early 1990s, the country garnered more than 11 percent of the foreign direct investment that was flowing to East Asia, according to UN data. That put it ahead of Thailand, Indonesia and South Korea – nations now beating Malaysia in luring foreign capital.

The East Asian tiger title originally referred to the economies of Singapore, Hong Kong, South Korea and Taiwan, which experienced decades of high growth that allowed them to join the ranks of high-income nations. Now, Malaysia trails the other so-called tiger cubs that hoped to follow the same path.

Last year, foreign investment in Malaysia rebounded to $7bn from a dismal $1.4bn in 2009, when it was hurt by the credit crunch and economic slowdown.

Companies with government ties had crowded out private investors in Malaysia’s economy, said Scott Lim, who manages the equivalent of $470m of assets as chief executive of Kuala Lumpur-based MIDF Amanah Asset Management. With little foreign capital, the country had fallen behind in the years since the Asian financial crisis, Lim said.

The government has tried to protect Malaysians from inflation with subsidies for petrol, sugar, rice, flour and other staples, said Gerald Ambrose, the managing director at Aberdeen Asset Management in Kuala Lumpur. It had also interfered in the labour market and favoured government-connected businesses.

Najib is trying to change that. He announced his economic strategy in September. As of April he had identified 72 large infrastructure projects in a dozen key industries such as petroleum, transportation and palm oil. These would generate 106bn ringgit (R236.5bn) of investment and almost 300 000 jobs, the government said.

“Under the economic transformation plan, 92 percent of investment will come from the private sector.”

Geoffrey Ng, the chief executive of HLG Asset Management in Kuala Lumpur, said Najib was moving in the right direction.

Ambrose said Najib’s decision to put Idris Jala, an experienced businessman with no political affiliations, in charge of the economic plan had boosted confidence.

To foster development of private industry, Najib, who is also finance minister, pledged to sell shares in state-owned companies to help double the size of the country’s capital markets by the end of the decade. Malaysia can already claim success in having made Kuala Lumpur a centre of Islamic finance.

Lynas was founded by Nicholas Curtis, a former executive director at Macquarie, Australia’s largest investment bank. The company said it had approvals to build its refinery in Australia and rejected that option because it couldn’t find a site that met its requirements.

China was also in the running to host the plant until the Chinese government decided to impose import and export duties on rare earths processed there. China today has a chokehold on production of rare earths, controlling more than 95 percent of the market.

Chief executive Curtis said his plant fit into Najib’s economic strategy. The government had shown its support by giving his project “pioneer” status, which includes a 12-year tax exemption. By making Malaysia the most important source of rare-earth materials outside China, the country could attract green industries such as wind turbines and hybrid cars, he said.

Curtis said he had met with Najib and discussed the plant, in particular when Lynas settled on the site near Kuantan, the capital of Pahang, the state the premier hails from. “I think he understands the opportunities and possibilities the project might bring.” – Bloomberg

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