Malaysia Rare Earths in Largest Would-Be Refinery Incite Protest

On a sweltering Sunday in April, more than 300 people pack a room above GC Curry House, a popular eatery on a tree-lined avenue in Kuantan on Malaysia’s east coast. They’re here to discuss the potential hazards of a rare- earth refinery Sydney-based Lynas Corp. is building about 25 kilometers 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 tells the 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 poses. That information draws boos from the crowd.

An audience member, Chow Kok Chew, says he used to live near a rare-earth plant in western Malaysia run by a joint venture that included Japan’s Mitsubishi Chemical Holdings Corp. (4188) and shut down in 1992. Carelessness by plant operators led to the radiation poisoning of local people’s livestock, he says.

Now a Kuantan resident, Chow, 61, sobs as he says, “I don’t want it to happen here.”

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

Photographer: Goh Seng Chong/Bloomberg

Najib Razak, Malaysia's prime minister. Close

Najib Razak, Malaysia's prime minister.

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Photographer: Goh Seng Chong/Bloomberg

Najib Razak, Malaysia's prime minister.

Safety Review

In response, the government on April 22 announced that an independent panel of experts would conduct a one-month safety review and hold up the plant’s pre-operating license until it was complete. Still, Lynas says it expects 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’s committed to an economic plan that seeks $444 billion 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.

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.

Luring Investment

In a March 29 interview with Bloomberg News, Najib said he would make sure the refinery is run safely. He also said Malaysia wants to attract foreign firms to boost growth.

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

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

“Malaysia has lost its competitiveness because it has not adapted to the changes in the global arena,” he says. “There has been a hemorrhage of talent out of the country.”

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

Slowing Growth

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, neighboring Singapore grew twice as fast.

Prior to 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 Corp. (INTC) and Seagate Technology Plc. (STX) The capital boomed and could boast the tallest buildings in the world when the twin, 88-story 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 United Nations data. That put it ahead of Thailand, Indonesia and South Korea -- nations now beating Malaysia in luring foreign capital.

East Asian Tigers

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 $7 billion from a dismal $1.4 billion in 2009, when it was hurt by the credit crunch and economic slowdown.

Companies with government ties have crowded out private investors in Malaysia’s economy, says Scott Lim, who manages the equivalent of $470 million of assets as chief executive officer of Kuala Lumpur-based MIDF Amanah Asset Management Bhd. With little foreign capital, the country has fallen behind in the years since the Asian financial crisis, Lim says. “We lost the last decade,” he says.

The government has tried to protect Malaysians from inflation with subsidies for gasoline, sugar, rice, flour and other staples, says Gerald Ambrose, managing director at Aberdeen Asset Management Bhd. in Kuala Lumpur. He says it has also interfered in the labor market and favored government- connected businesses.

‘Too Comfortable’

“The Malaysian private sector perhaps didn’t have to strive so hard to survive as they did in neighboring countries,” Ambrose says. “It became too comfortable.”

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 106 billion ringgit ($35.5 billion) of investment and almost 300,000 jobs, the government says.

“Let me put on record that under the economic transformation plan, 92 percent of investment will come from the private sector,” Najib, 57, said in the interview at his office in the government center of Putrajaya, south of Kuala Lumpur.

Geoffrey Ng, who manages $1 billion as chief executive officer of HLG Asset Management in Kuala Lumpur, says Najib is moving the right direction. “Prime Minister Najib’s transformation plans for Malaysia are refreshing and indeed ambitious,” Ng says. “As is usually the case, execution is the key.”

Idris Jala

Ambrose says Najib’s decision to put Idris Jala, an experienced businessman with no political affiliations, in charge of the economic plan boosted confidence. Jala turned around money-losing Malaysian Airline System Bhd. (MAS) while he was CEO of the state carrier from 2005 to 2009.

To foster development of private industry, Najib, who is also finance minister, has 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 center of Islamic finance.

Lynas was founded by Nicholas Curtis, a former executive director at Macquarie Group Ltd., Australia’s largest investment bank. The company says 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’s Dominance

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.

Curtis, who is CEO, says his plant fits into Najib’s economic strategy. The government has 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 of China, the country can attract green industries such as wind turbines and hybrid cars, he says.

Curtis says he has met Najib and discussed his 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.”

Money managers such as MIDF Amanah’s Lim agree that Malaysia needs to draw overseas investors. “In order to have a thriving economy, you need to have foreign participation from the private sector,” he says.

‘Dangerous Projects’

Lim is nonetheless sympathetic to the protests over rare- earth processing. “I wish we were more careful and would not let dangerous projects start operation in Malaysia,” he says.

Opponents of the Kuantan project are growing more vocal. Their concerns about radiation were galvanized by the releases of contaminated steam and water from the Fukushima Dai-Ichi nuclear plant in Japan that was ravaged by the March 11 earthquake and tsunami.

The International Atomic Energy Agency in late May appointed the independent panel that Najib’s government promised to convene. The nine health and safety experts are carrying out their review of the Lynas project in Malaysia through June 3, and the group will submit its report to the government by the end of the month.

Lynas’s Curtis says his Malaysia plant will be safe.

The potential hazard comes from the desired metals such as neodymium and yttrium being found in ore that contains radioactive thorium.

‘No Risk to Health’

The ore that will be processed in Malaysia comes from a mine in Australia and has very low levels of thorium, Curtis says. “There is absolutely no risk to public health,” he says.

T. Jayabalan, a doctor who says he has been monitoring and treating patients affected by the Mitsubishi Chemical plant that shut two decades ago, is wary of Lynas’s assurances. The argument that low levels of thorium in the ore make it safer doesn’t make sense, he says, because radiation exposure is cumulative.

Najib says the plant will be watched carefully: “If it does not meet best international practices, then we will review.”

Chow, at the meeting in Kuantan, says some of his neighbors used bags of fertilizer that contained radioactive waste. They spread it on a plot where animals grazed. “The cows that ate the grass all died,” Chow says.

Asian Rare Earth

Osamu Shimizu is a director of Asian Rare Earth, the joint venture partly owned by Mitsubishi Chemical that ran the plant in western Malaysia. He says the company might have sold a few bags of calcium phosphate fertilizer on a trial basis as it sought to market byproducts. Unlike the thorium from rare-earth processing, calcium phosphate is not radioactive or dangerous, he says.

These days in Balok Makmur, a neighborhood just 3 kilometers (2 miles) from the Lynas site, residents say they live in fear. The entrance of the village has a banner written in the Malay language: “Stop Lynas, Save Malaysia.”

Seated at a table at the Warung Kak Ani outdoor restaurant, Zakaria Mohamad, 54, says the promise of economic benefits to Malaysia seems remote, while the threat posed by the plant is immediate. “We don’t want Lynas,” he says. “Life here is simple, content and peaceful, and we don’t want that to change.”

For Najib, life is less simple and peaceful as protesters reject a plant that is supposed to boost Malaysia’s development. Instead of having a showcase of how the country can appeal to foreign investors and shake off a decade of subpar growth, he faces angry voters who want the project to go away.

To contact the reporter on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net.

To contact the editor responsible for this story: Laura Colby at lcolby@bloomberg.net

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