Lynas: Why in Malaysia, not in Australia?

— Rama Ramanathan
The Malaysian Insider
Mar 11, 2012

MARCH 11 — Previously I said that the root cause of the Lynas controversy is our ‘need’ for things that need rare earths. These things include cellphones, disk drives and television sets. I also said that China supplies over 95 per cent of the world demand for rare earths, and that the Lynas plant could supply up to 35 per cent of world demand.

I added that the attitude of the government of Malaysia toward its citizens is less like that of the government of Australia and more like that of the government of China. Much of what I said was sparked by the observation that Lynas has chosen to do something which seems rather strange to those who remember tin mining.

Malaysia was at one time teeming with tin mines. The tin was dug up, processed into high purity ingots and shipped worldwide. We didn’t ship ore. We shipped tin. Similarly, we don’t ship what we harvest from oil palms. Instead, we convert the fresh fruit and bunches into products which we sell worldwide. Malaysia is a world leader not only in growing oil palm, but also in processing oil palm and it’s effluents.

So, why is Australia — a mining nation — not processing the ore into the final product?

I have a degree in mechanical engineering. I’ve worked in industry in the UK and in Malaysia. I’ve been responsible for factory design, construction and maintenance. I’ve been responsible for compliance with statutory requirements and corporate policies.

I’ve also been responsible for evaluating investment decisions. I have personal experience of reviewing tax benefits, extent of regulations, predictability of regulators, etc. when making investment decisions.

I have a generally good opinion of professionals, shareholders and regulators. I’ve yet to meet professionals whose goal in life is to harm others, but I know how corruptible we are: Bukit Merah is only one of many proofs of how low we can fall.

In response to my last piece on Lynas, someone commented that one key reason for Lynas coming to Malaysia is the shortage of water in Australia and the abundance of water in Malaysia. I tried to pursue that point, to see if I could convince myself of the logic.

I learned that the Lynas plant is expected to discharge upto 213 cubic metres of treated water per hour, into the Sungai Balok river. That’s a lot of water — which is subsidised by the taxes we pay.

According to a Malaysian government website, different states charge different rates.

For industrial usage, in 2009, Pahang charged RM1.45/cubic metre, while Johor charged RM 2.93/cubic metre. (In the Peninsula, the cheapest was Penang at RM 0.94)

If Pahang charges Lynas RM 1.45 per cubic metre, the annual water bill for Lynas would be about RM2.7 million. If the cost of treating the used water before discharge is the same, it will cost about RM5.4 million per year for water purchase and treatment.

How does this compare with the cost in Australia?

I’m no expert, so I’ll just pick a number which goes with what seems like an appropriate description. “Metropolitan non-residential water, 350 mm meter,” costs RM 5.48 per cubic metre: nearly four times more expensive than in Pahang (Gebeng) — assuming the Australian water authority agrees to supply the required volume.

If we again assume the cost of treatment before discharge is equal to the cost of purchase, the total cost of water purchase and treatment in Australia will be about RM20.5 million per year.

Is the cost of shipping concentrated ore from Mt Weld to Kuantan less than RM15 million per year? I have no idea. I do know the cost will vary due to fuel price escalation, and I do know shipping is subject to risks.

It’s hard to believe water drove the decision, but that’s what Lynas says.

According to the Ministry of International Trade and Industry (MITI), Lynas says it chose to locate in Gebeng because of 3 benefits: (1) proximity to Kuantan port, (2) availability of gas, water and ample chemical supplies, (3) availability of skilled workers.

Nothing is said of the regulatory environment, both with respect to the regulations and with respect to the enforcement agencies. Nothing is said of taxes. Nothing is said of the cost of land. Nothing is said of the cost of chemicals, transportation, etc.

I discuss the above because I am not an enemy of technology. I want the world to be able to enjoy the benefits of televisions, disk-drives and cellphones. I want jobs in Malaysia. I want Malaysia to be a refining influence in the world, to have great workplace practices.

I recognise that investment decisions are difficult — shareholders part with billions of dollars in order to fund projects like Lynas.

Engineers and analysts make assumptions, perform calculations, set up models. Supporting industries invest in upgrades to be able to meet the needs of the new player. Governments should not flip-flop on decisions.

The government of Malaysia now says that Lynas must “accept a return of any residue generated by its factory in Gebeng to its original source.” If this means return to Mt Weld, it’s outrageous that this wasn’t stipulated before Lynas bought the land and started construction. If we insist on this clause, will we have to compensate Lynas? Remember the aborted train project? Note: It is not lost upon me that ‘original source’ is a very debatable concept when it comes to sludge.

We are so convinced politicians are corrupt, we think the worst about everything. In fact, if you challenge people who support the Anything But Umno (ABU) movement with the corruptibility of the alternative to Umno, their response is “can it be worse?” I agree, it cannot be worse. But that doesn’t mean we stop thinking logically.

I return to the economic case for Lynas.

What is the cost of transporting bulk material from Mt Weld to Perth to Singapore to Kuantan to Gebeng? What additional cost would Lynas have incurred if it built the plant in Australia rather than in Malaysia? There are two components to this cost: (a) differences in design due to climate and regulations; (b) differences in building costs. What would be the additional operating costs with respect to materials and labour? What ‘inefficiencies’ will there be in Australia due to less-pliable Australian employees?

And, what does Malaysia get in return for the savings to be enjoyed by Lynas and the world through greater availability of rare earths?

What’s the benefit to the taxpayer?

I searched the MITI website in vain for the answer to my question. In my next post I will discuss the solid waste to be generated by Lynas.