Well, tonite we (the probably over invested true believers) find ourselves just a few sleeps from the start of some big announcements that many of us have been waiting some years for.
So, I figured that given we are in a TH I would contribute some of Jvest's deep dive research to the site. At the very least it will help some to pass the time during the TH. At worst, Jvest will simply bore the hell out of you!
I have observed in the past month or so that a bit of emotion seems to have spilled out surrounding the potential location of the Tivan Refinery in Malaysia...but I haven't really seen solid research as to why we must locate the Tivan Refinery in OZ (as admirable & patriotic as that may be).
Like other holders, I have been reading & researching this subject for some time & trying to strategise the TNG thinking.
If POSCO approaches you with an attractive financial deal to build the refinery in Malaysia and they have close ties with Woojin, who in turn want to be a key partner in the project, what would you do?
I have re-read many key consultant reports recently & over the years have always been impressed by Hardman & Co.
Below is an extract from their (very lengthy) June 2014 report. It is readily available on the TNG website.
" When compared with the Mount Peake location for a processing plant, the energy infrastructure is of a different class entirely. The TiVAN™ plant would be one of the first customers on a major gas pipeline as well as a high voltage grid power corridor and right next to strategically important installations in a nation Kenaman Port/Chukai appears to be the best fit for TNG’s announcements where energy prices are routinely capped to promote specific government-led economic goals. Short of a direct feed from a nuclear power plant or sitting on top of its own gas well, it is difficult to see a significantly more energy secure location."
For those who are truly interested in fully understanding the thorough research on why Malaysia appears to be a superior location, there is much more to read. I commend you to tackle the full document that follows.
Extract fromTNG report - Hardman & Co / 30 June 2014 (see TNG website for full report)
"Malaysia
At present TNG is seriously exploring Malaysia as a location for the downstream processing portion of its business model so we feel that is it worthwhile exploring why this may be the case and how the Malaysian economy and politics could impact TNG’s plans.
The Basics
Malaysia is a nation of around 30 million, with population split between coastal urbanites and a mainly rural population located in on outlying islands and in rugged highlands. There is a significant developmental split between the two populations with the coastal cities having an economy broadly comparable to many Western industrialised nations but the more remote rural inhabitants lacking some basic services, such as mains electricity. In part this is due to geographical constraints but there are also significant cultural differences between largely indigenous tribal communities located in the highlands and islands, and the more cosmopolitan and ethnically diverse urban dwellers. Non-tribal indigenous Malays are predominantly Muslim and, while they are generally economically mobile, the tendency is to retain strong links to ancestral villages. In the last 20 years rural to urban migration has seen a 50/50 population split in 1990 shift to a 30% rural/70% urban split in 2010.
Coastal trading economies also have strong representation from both ethnic Chinese and ethnic Indian communities so that just fewer than half the population outside the tribal communities can trace ancestry to non-indigenous cultures.
After winning independence from the UK in 1957, following an acrimonious and often brutal jungle war, Malaysia’s history was marked by a period of antagonism with neighbouring Indonesia and internal ethnic conflict as the majority indigenous Malays fought to establish economic and political parity with the more commercially and politically powerful Chinese and Indian communities.
The modern era of Malaysia’s political history started in 1971 when the government enacted its second integrated New Economic policy plan, scheduled to run for 20 years and broken down into 5-year periods. Its first plan, running between 1966-1970, failed to deliver tangible results or address the underlying ethnic conflict and simply placed ethnic Malays as a dominant political force that has not been overturned since.
Subsequent 5-year plans have been enacted and executed continuously since then and meetings are currently underway to roll-out the 11th Malaysia Plan, otherwise known as 11MP, in 2015. 11MP is the last of the plans to run before the government’s own target of achieving a global status as an affluent nation (the metric being used in 2012 was a per capita GDP of just under US$15k pa) runs out in 2020. It is unclear what comes after 2020 in terms of aspiration but given the national momentum it is unlikely that Malaysia will substantially alter its direction of travel.
The over-riding economic success of the more recent economic plans, built as they were on emergency laws aimed at ending domestic conflict in favour of the ethnic Malay population, has enabled a highly technocratic, if authoritarian, government to evolve but also for Malaysia to drag itself out of mass poverty. For these reasons the majority of Malays are generally supportive of continuing technocratic policy control over and above a fully liberalised economic model.
However, being academically driven and motivated by the success of this approach as well as external encouragement, Malaysia’s policy makers are undertaking a program of market liberalisation, albeit gradual and limited. For example; the domestic car maker Proton was privatised, widespread fuel subsidies are being tapered with the aim of elimination by the end of 2020, and the national petroleum company, Petronas, has been forced to open to competition.
Alongside this economic liberalisation is a very gradual thawing of the longstanding political freeze-out of effective opposition to the dominant United Malays National Organization (UMNO) and their partners in the Barisan National Coalition, The Malaysian Chinese Association and the Malaysian Indian Congress. This three-way coalition, representing the three main ethnic groups, has delivered stable government and genuine economic development for Malaysia but is now showing its age. Political dissent is growing, gently compared with neighbouring Thailand, but it is discernable. It remains to be seen whether relaxation of state media ownership and command and control economics is enough to stem the global anti-establishment tide at a national level.
What we have then, in many ways, is a functional model for technocratic but also democratic government of a medium-sized, strategically located, trader economy.
With that short historical analysis in mind we can explore the potential impacts that locating operations in Malaysia may have for TNG and its shareholders. But first a short aside regarding the maintenance of Malaysia’s technocratic style of government.
Malaysia-UK-Australia Academic Links
One of the more remarkable facts regarding the nature of Malaysia’s deep links especially to the UK, but more generally to Anglophone academia, is that 44% of the current Malaysian cabinet attended UK universities. Nottingham, Newcastle Upon Tyne, Southampton and Reading Universities all have satellite campuses in Malaysia and a number of other UK institutions have close ties, especially in the fields of medicine, law, engineering and business studies.
Australia has a similar relationship of academic exchange including three satellite campuses (Monash, Curtin and Swinburne) however, and slightly surprisingly given its relative proximity, only around half the number of Malaysian students attend Australian institutions as attend British institutions.
Together over 800,000 Malaysians (~4% of the urban population) count themselves as alumni of either UK or Australian universities, a fact which maintains the foundations of mutual understanding between modern professional and political cultures of the three nations.
Malaysian Legal System and Business Climate
As might be expected with its long colonial history Malaysia’s legal structures are well defined if complex, with both national and federal statute based initially on UK common law, but with Muslim sharia structures relating to personal matters. Additional complications exist in the execution of land rights where the Australian Torrens system is used and in some other aspects where either Indian or Australian implementations of UK common law are preferred.
However in practice, because sharia law is only applied to Muslims and then generally only in their personal interactions (as opposed to business dealings with external investors, for example) much of the perceived complexity is avoided.
Helped by a largely bi-lingual political and commercial class, Malaysia has been climbing up the World Bank Ease of Doing Business Index over recent years. Where in 2007 it was in 25th place it has climbed every year since then to reach 6th in 2014.
Notably for TNG, Malaysia has topped the ranking for ease of gaining credit in 2012, 2013 and 2014. Unfortunately where construction and land are concerned it's not such good news and outside of the well defined Economic Development Zones gaining permission for property acquisition and construction can still be long-winded. The government development agencies are very much oriented towards providing planned infrastructure within those designated development zones before marketing a location, rather than allowing unstructured development.
Malaysia’s Long Term Economic Policy
With a pre-planned, widely-debated and published economic policy running in handy 5-year chunks and known (in draft at least) 2 years in advance, Malaysia is a great place to plan a long-lived venture. Its not necessarily the cheapest place to engage in consumer-based product sales as the regulatory burden is both significant and legally well constructed, but for a company seeking a stable economic environment there are few democracies that are better able to attract inwards investment right now. According to the World Bank only 5 nations are easier to do business in and two of those (HK & Singapore) probably wouldn’t have space to host TNG’s processing plant.
Domestically the population is growing, but only really because the implementation of universal modern healthcare and increasing economic affluence are resulting in rapidly increasing average life-span. Birth rates are not rising significantly but infant mortality has dropped to western levels. Of course this demographic shift was anticipated by the government and it’s recent policy has focussed on creating a strong manufacturing base that is able to provide good incomes for the widest possible cross-section of its population alongside an international trading and financial sector building on its national economic roots and strategic location.
If all that sounds too good to be true, in part at least, it is.
In many ways the city-state of Singapore is Malaysia’s big problem. It is the Malay Peninsula’s London on the Malacca Straights. An inherently international city that is a gravity well for regional investment in the skills economy, but one that is geographically small and culturally embedded in a wider economy that dances to a different beat. Indeed Singapore was part of Malaysia until 1965.
Singapore’s 5.5 million population have a GDP broadly similar to that of Malaysia’s 30 million so that per capita income on the island is 4 times that on the mainland. Obviously lacking the economic drag of a hinterland has done Singapore’s service sector plenty of favours but, as visitors will know, it does come at a social price and it also leaves the city-state vulnerable to macroeconomic and technological shifts. Singapore’s leadership seem to take the position that they cannot be subject to those shifts if they are leading them. The thesis is debatable as long as trade is rooted in physical commodities.
Mainland Malaysia’s response is to try and build Kuala Lumpur into an international hub city that is able to compete with Singapore in the knowledge economy but retains the cultural and social capital of the nation’s long and varied history.
Where, due to lack of local resources, Singapore is unable to manufacture consumer goods and has no option but to rely entirely on international trade, Malaysia has both the space and a degree of domestic natural resource provision upon which to add value in varied supply chains.
The Formula One road-show is an excellent cultural artefact with which to illustrate the different macro-political approaches to development in adjacent contexts. Where Singapore uses its metropolitan authority to shut the crowded Malaysia’s economic policy is built on the back of a 50-year old government 30 June 2014 16 city centre for a few nights a year and spends millions flying in the latest celebrity turns to add fleeting glamour to its event, Malaysia constructs a permanent out-of-town mega-circuit with iconic lotus-leaf stands and its national petroleum company sponsors the winning Mercedes AMG F1 team. Where Singapore is all about short-term impact and keeping ahead of the pack, Malaysia thinks long term. Of course their starting lines were different but still the difference in strategy is stark.
9MP to 10MP to 11MP – Mid-term Policy Direction
Resource allocation in 9MP (2005-2010) was 78% to physical infrastructure and only 22% to non-physical (i.e. skills, administration, legal, etc.). Within this the sector-by-sector allocation was 5% General Administration, 10% Security, 34% Social and 51% Economic.
In 10MP (2010-2015), the majority of large-scale infrastructure projects had been undertaken, so resource allocation was shifted away from the physical (60%) and towards the non-physical (40%). The balance of allocation was also shifted slightly more towards direct economic encouragement, especially of SMEs, so that Social funding dropped to 30% and Economic funding rose to 55%. GA and Security funding allocations remains unaltered.
The primary vector for these policy expressions is the new focus on competition between SMEs as a means of driving high value growth. Subsidies and price controls are being rationalised or phased out across the board. A new Competition Law was enacted in 2010 with new a Competition Commission and an Arbitration Service are scheduled to be started in the near future.
Malaysia’s academic focus is to be turned more towards economically-relevant innovation and there is a strong similarity to the UK’s approach in its promotions of university-led research and partnerships with industry.
Under 10MP this has led to a 7.2%pa rise in service sector GDP with manufacturing just behind at 5.7%pa, while construction, agriculture and mining industries lag at 3.7%pa, 3.3%pa and 1.1% respectively.
In 11MP (2015-2020) the ‘noises off’ are that there will be a renewed focus on building value-added exports on the basis of primary industries, notably Malaysia’s palm oil production which currently contributes around 9% of national export revenue and providing the infrastructure for developmental uplift across the rural population. Both a program of rural electrification and minor road building have been mooted to spread the rewards of urban development more evenly, but also to allow domestic goods to get to market more easily. Regional ports and airports may also be beneficiary on this focus on social as well as economic cohesion.
Government spending on affordable urban housing has also been cited as a probable area for growth and it seems likely that an increased reliance on speciality steels used in high-rise accommodation would arise from that focus.
So in general terms 11MP seems likely to be a plan aimed at spreading the benefits of the last two decades of Malaysia’s growth away from the urban centres, and maybe to finally address some of the underlying grumbles about economic parity between ethnic groups that have existed since independence.
We expect Economic funding to grow still further and for that to be more concentrated on creating favourable conditions for domestic SMEs of all flavours to innovate. Whether it is fresh vegetable deliveries driven by internet apps and supported by improved communications or patented technology in ICT or aerospace, the Malaysian investment cycle is getting very close to that seen in western economies.
Energy Policy in Malaysia
Energy policy direction is set by two over-riding motivating factors; the depletion of Malaysia’s offshore oil & gas reserves and the tapering of domestic fuel subsidies. Subordinate to these is an aim to reduce the carbon intensity of industry through increased efficiency and by adding a significant amount of solar PV to the generating mix, initially at a domestic scale.
An increased role for biofuels, in particular 3rd generation liquid biofuels generated from wastes arising from palm oil production, is already underway though, conceptually at least, it seems mainly to be as a means of offsetting mid-term depletion of mineral oil rather than driving down energy prices in the long run.
The current electricity generation mix in Malaysia is dominated by domestically produced natural gas (>50%), with coal (~40%) and hydropower (~8%) coming in second and third. Non-hydropower renewables contribute ~2% of electricity production.
Oil & Gas Depletion
Hydrocarbon exploration in the South China Sea, as everywhere, is getting more expensive and on current reserves Malaysia has around 39 years gas production left and 25 years of oil. Many analysts are anticipating that the nation will become a net importer of oil at some point between 2017 and 2020, however stimulation techniques such as EOR have only recently been planned for Malaysian fields and it may be that the ultimate date of depletion can be stayed somewhat.
Unlike many oil-exporting countries Malaysia’s mineral oil exports are a relatively minor component of overseas trade. Palm oil and LNG both make a more significant contribution to balance of payments.
So the main impact of the oil industry’s decline will be on domestic fuel prices, both through the vector of potential gas imports and their impact on electricity prices and through the cost of road transport.
The government’s response is to taper domestic fuel subsidies and to introduce competition to the state oil company, Petronas, as a means to drawn in expertise and drive down exploration costs. The introduction of bio-fuels as an additive to road fuels is also a component of their response.
Arguably the more important of these actions is the reduction of the subsidies on transport fuels as it amounts to around 10% of all government expenditure and around 2% of GDP. There is an obvious political balance to be struck while removing long-lived fuel subsidies and we can see some of those sensibilities being expressed in the proposed rural electrification and road-building programs between 2015 and 2020.
An Increased Role for Coal, Solar and Maybe Nuclear
Malaysia is in a slightly odd position technologically. Where most western nations are seeing gas a bridge fuel from coal to a higher penetration of renewables +/- nuclear, Malaysia is seeing coal as a bridge from gas to renewables +/- nuclear.
Malaysia does see distributed solar power as a significant contributor to the energy mix after 2035, but is exploring civilian nuclear power alongside an increased role for coal as depletion of domestic gas production takes grip.
Solar is an obvious choice for an Equatorial nation. Relatively low wind speeds, a high proportion of forest cover, low tidal ranges outside the busy shipping channels and a high insolation (similar to Sydney or around 50% higher than the South coast of the UK) tilt the fundamental economics strongly towards solar of all the available non-hydro renewables. However the twice-yearly monsoon means that even solar power swings between seasonal highs and lows, making it much more difficult to build a growing economy on.
The government’s recent enactment of a Feed-in-Tariff has seen a growth in small-scale and domestic solar PV installations that it hopes will translate into a widespread and self-supporting industry, but there are few outside advocacy groups who see the current solar technologies as viable base-load providers, even with utility-scale energy storage attached. Providing for domestic daytime consumption is a different problem to running a blast furnace and the need for energy storage for remote and off-grid rural locations is unlikely to translate into demand for high value new technology in the near term, even with government support.
Whether the government ever actually commits to nuclear power or not is a moot point at present, but it is worthwhile listening out for comments regarding nuclear non-proliferation whenever a major diplomatic exchange takes place. Malaysia already has a well-developed regulatory regime to be able to control radiation hazards arising from medical and industrial uses, but there are no civilian nuclear power plants either planned or operational in Malaysia. However as a major trade hub and contributor to the IAEA it does actively participate in non-proliferation activities.
The big investment in recent years has been into new coal-fired plant, with 2GW of new capacity expected to be fired up in the next 2 years and looking set to use some of the 2Tn tonnes of domestic coal reserves located in Sarawak or seaborne coal from Indonesia. With an economic focus on manufacturing industry, a reliable base-load supply is understood to be critical and though it is a signatory to and ratified the Kyoto Protocol, Malaysia is not bound by any specific carbon emissions commitments or targets.
Hardman Comment – Malaysia’s interest in renewable energy seems to be an aspirational target rather than one that it feels it must meet with explicit actions. It is a badge of development as well as a means to offset petroleum depletion.
Its foray into liquid biofuels is a natural adjoinder to its massive palm oil industry, and when coupled with its long term commitment to spending on biomedical education, should see it ramp up the systemic efficiency of that sector in time and using domestic talent.
Of course there is a potential for energy storage systems to be installed to help manage the penetration of domestic and small-scale solar PV, but the proposed timescale of Malaysia’s solar ambitions and its geographic distribution mean that it is likely to be over a decade before a significant domestic demand for technologies such as the vanadium redox battery materialises. As always the potential benefits of renewable energy technologies are location specific.
International Trade Partners
Malaysia is a member of ASEAN and party to its Free Trade Agreements with the EU and China amongst others. Malaysia is also party to a number of bi-lateral FTAs, notably with Australia, Japan and India. It is also party to the on-going Trans-Pacific Partnership process, though there is domestic dissent against fully open borders, especially for the US.
Malaysia’s Strategic Partners
Obviously China is a growing influence on all national outlooks in this region but perhaps the best lenses through which to view the changing dynamic on the Malacca Straights are diplomatic and historical relationships.
Malaysia’s historic ties with the UK and its membership of the Commonwealth remain strong and its participation in the ‘Five Power Defence Arrangement’ alongside the UK, Australia, New Zealand and Singapore see it exchange information and staff in that context. The UK has a small naval detachment on station in Singapore to facilitate and help formulate the group’s responses to any military aggression towards or on the Malay Peninsula, but the pact falls short of unambiguous mutual defence.
Malaysia has cordial relations with the US, but no more. It was apparently hoped by the US that President Obama’s visit in late April 2014, the first by a sitting US President for 48 years, would help warm the diplomatic climate, but little of substance arose from the trip. An agreement to talk more and at a higher level seemed to be the most concrete outcome.
Commentators seem to infer that Malaysia’s growing self-confidence, arising from its weathering of the GFC relatively unscathed and continued resistance to fully liberalised markets, causes it to reject US overtures couched as they are in terms of democratic rights. The US’s relatively strong relationship with Malaysian ties with other Commonwealth nations are strong. 30 June 2014 20 Malaysia’s neighbour across the water, Indonesia, may also be a source of disquiet in the Malaysian diplomatic corps.
So while the US can claim to be Malaysia’s biggest inwards investor at $40bn in 2013 much, if not most, of that investment spike was by US oil companies buying fields from Petronas rather than into the broader land-based economy and the predominant diplomatic tilt is currently towards attracting Chinese businesses. US FDI had been running at around $2bn pa.
In recent years China has developed diplomatic relations through ‘friendship and cooperation’ and more recently on into ‘defence and security consultation’ to the current situation where the premiers of China and Malaysia discussed China’s proposed ‘Treaty on Good Neighborliness, Friendship, and Cooperation’ at an ASEAN conference in October 2013. This would see increased military cooperation as well as diplomatic entente.
China’s naval interests in the Straights region are obvious and this diplomatic effort, in comparison to the USA’s narrow investment focus, is backed by quite a broad front of spending in the Malaysian economy. Malaysian-Chinese bi-lateral trade has been growing at 18% y-o-y since 2000 to a 2013 value of $106bn.
Hardman Comment – The governing UMNO party obviously don’t like the Americans demanding that they open their political realm in return for red in tooth and claw capitalism. It seems like a loose-loose situation to them. The state controlled capitalism model that China has developed is much more attractive and is a better fit for a majority Muslim nation where sharia law is highly influential on attitudes towards debt.
Malaysia’s model is not anti-business, it’s just not business at any cost. It is also worth remembering that national independence was won from Britain largely on the back of a Communist insurgency at a time when the US was starting to put boots on the ground across South East Asia. The old guard may be loosening their grip on the economic reins but, even with unresolved tensions between ethnic groups, China still looks better than the US to Malaysia’s elite.
Money talks in every language, but sometimes its tone of voice is important.
A Shifting Focus Towards Domestic Innovation
The government believes that the underlying goal of breaching the US$15,000 per capita GDP target by 2020 cannot be achieved by exploitation of domestic natural resources or international trade alone.
All the policies discussed above, the market liberalisation, the promotion of tertiary education and economic development, are built on the idea of an economy based on domestic innovation and the promotion of higher value manufacturing and services. And while there is little inherent argument that this is A route to a sustainable economy, it isn’t necessarily the only one or indeed necessarily the one best suited to Malaysia. So it is worth looking at the data to see if the previous Malaysia Plans have worked towards this general goal.
If we look back at the data we can see innovation rates start to really take off in the period 2003-2005 (under 8MP) and for those rates accelerate through 9MP and into 10MP. However, the drop in domestic patents in 2009-10 is rather surprising and demonstrates that not everything goes to plan, even in Malaysia.
Figure 1: Malaysian scientific and product innovation rates vs. GDP per capita. Source World Bank (Sorry couldn't attach chart. You will need to view it in the 30 june 2014 source doc.)
Obviously the GFC hit investment in Malaysia as it did almost everywhere, but it may also be that local market structures (as opposed to conditions) are not yet robust enough to encourage innovators to stay in Malaysia, rather than decant to, for example, Singapore, the UK, Australia or the US. However it seems likely that, in addition to a Brain Drain, a cultural bias towards academic or civil service careers, as opposed to technological innovation within a business setting, is being exposed as the pool of experienced entrepreneurial talent is limited.
Moreover the rate of journal publications includes publication on medical innovation within Malaysia’s well-developed national health service, so it would seem that the government has a task on its hands to get to the desired levels of SME innovation and its leading role in revenue production. This is not necessarily surprising given the focus on using the UK’s institutional models as a starting point and Britain’s own well-known and long-lived issues around academic innovations reaching economic productivity.
Growing Malaysian Manufacturing
The Malaysian GDP has been rising consistently at 5% for the last three years, in line with the regional trend, but that rise is not spread even through its economy. It has obviously benefitted from increased prices for its exported LNG, and especially from its close trade links to Japan, but in the domestic economy growth is very much focussed on “Machinery and Transport Equipment” which currently means car making and its supply chain, but which the government certainly hopes will include aerospace in the near future.
Malaysian car ownership has been largely driven by domestic production with well over half of all vehicles on the road built by two domestically grown companies; Proton and Perodua. Some models of Peugeot and Kia are also built in the country.
Until its final privatisation in 2012 Proton was owned by a government investment fund and though it has become a relatively well-known budget brand in the UK, especially through its ownership of the Lotus brand and collaborations with Mitsubishi, it is still working to establish an identity of its own and a reputation for car design, as well as construction of re-badged models. Its new owners, the Malaysian transport-centred conglomerate DRBHICOM Berhad, has close ties to a variety of international auto-makers including Volkswagen, Suzuki, Yamaha, TATA, Honda, Mercedez-Benz, Isuzu and Mitsubishi.
As part of this wider automotive group Proton is the flagship brand and the focus for aggregating technical development applicable to the mass consumer market, but the group’s performance vehicle, military and motorcycle divisions are also significant drivers for technology within the group and we expect both internally designed mass market cars and niche sector vehicles to be brought to market in the mid-future.
Perodua is a slightly different story. It was set up as majority-owned domestic compliment to Proton in 1992. It does not compete directly with Proton’s range and, initially at least, did not design its own cars but instead bought in technology from Daihatsu. It specialises in small and city cars, with a focus on budget export markets in Africa and the Mid-East.
With new models starting at around £4,600 (excluding tax) it is very popular domestically and second only to Proton in Malaysian car sales. The increasing affluence and aspiration of the domestic market is driving innovation and in recent years Perodua has started exporting to the UK and Ireland, a significant move into the EU trade zone with all its implications for the auto-maker contained within comprehensive product design standards.
The Importance of Being an Auto Producer
Auto-making regions around the world know a car factory can be very good news for a regional economy. From design studios to paint makers to tooling companies and logistics, the impact of the auto industry supply chain is vast and stretches far beyond simple fabrication.
So obviously it’s good news for Malaysia’s people that it can produce cheap, and now export quality, cars but why should this Malaysian focus on cars matter to TNG in particular ?
We cite three main reasons;
Government commitment to establishing a domestic supply chain capable of exporting automobiles to the exacting standards of the European export market means that those car factories will need increasing amounts of vanadium and titanium as the global lightweighting trend spreads from performance models to mass market models. So the Malaysian production capacity is at the right end of the demand/technology curve for TNG to establish a strong commercial position for the long term in the local market.
Mass-market auto production is an entry-point for more advanced engineering. As Proton are showing with their acquisition of Lotus and partnership with Mercedez-Benz they have ambitions to enter performance markets. Performance markets have significant cross-over with aerospace and aerospace is a major consumer of both vanadium and titanium. The government has a taskforce engaged in pushing towards development of a domestic aerospace industry. Generally speaking the more strategically important the market, the more policy focus that is given to securing its supply chain.
The fostering of general engineering skills necessary to build car factories begets an ecosystem of engineering companies able to support TNG’s production capacity without having to fly people in from the Proton now privatised and seeking to modernise its range Perodua building to export quality but focussed on budget markets other side of the continent. So whether it is fixing broken plant or adding a new capacity local talent is almost always preferable in the long run.
Malaysian Economic Development Zones
EDZs are a well-used idea to help spur industrial development through co-location of interlocking manufacturing capacity enabled by well-constructed infrastructure. The idea of providing a good transport and utility base to attract industry is as old as the hills but since the 60s this has often been backed by comprehensive tax incentives, free trade zones and streamlined permitting. Sometimes even reduced utility costs are enabled by long-term commitments by energy-intensive industries.
Malaysia is a particular fan of the EDZ concept. So much so that economic zones of one form or another cover almost all of peninsular Malaysia, which devalues the concept to a degree until we remember Malaysia’s slightly tricky land laws and the EDZ’s role in helping structured development.
Figure 3: East Coast Economic Region (Sorry couldn't attach map. You will need to view it in the 30 June 2014 source doc.)
The best known, Iskandar Malaysia or IM, was established in 2006 under the 9th Malaysia Plan and covers over 2,200km2 of land around the southern city of Johor Bahru.
However, the tidal pull of Singapore is already creating issues for this super-successful EDZ and, more pertinently for policy-makers, it is not contributing to broad-based economic development further north as well as they might have hoped, rather IM seems to be feeding its competitor’s success still further.
Hardman Comment - Looking at TNG’s announcements it appears that the East Coast Economic Region is the focus for their interest. Inspection of the relevant government information suggests to us that Kemaman Port to the north of Chukai is the most likely destination in that region. So we are going to take a closer look to explore the kind of infrastructure that Malaysia can offer to draw TNG away from the Northern Territory as a location for its processing plant.
Figure 4: Satellite image of the Port of Kenaman, Terenganuu State, Malaysia. Source Google Earth http://goo.gl/maps/V2Ud4 ((Sorry couldn't attach Map. You will need to view it in the 30 June 2014 source doc.)
Kemaman Industrial Infrastructure
The region is the mainland focus for Malaysia’s offshore oil and gas industry, so has a broad base of heavy industrial skills as well as LNG and petroleum handling facilities, two universities, Malaysia’s largest gas-fired power plant, the 1.1GW Sultan Ismail Combined Cycle facility and the 400MW Sultan Mahmud hydroelectric power station.
Oil and gas from at least six fields is landed at Petronas’ Paka refinery, about 40km to the north of Kemaman Port, and gas pipelines exist through the area to feed coastal towns to the south. Kenaman is then close to the beating heart of Malaysia’s East coast energy infrastructure which supplies the needs of around 2.5 million people in the Terenganuu and Pahang states, as well as exporting oil and gas internationally.
The regional development strategy states that it will be used as a heavy industrial hub and there are already steel works owned by Prewaja next to the wharfs. At 14 and 16.4m draft respectively its dry bulk handling facilities are more than capable of receiving anything that can exit Darwin’s new Eastern docks.
When compared with the Mount Peake location for a processing plant, the energy infrastructure is of a different class entirely. The TiVAN™ plant would be one of the first customers on a major gas pipeline as well as a high voltage grid power corridor and right next to strategically important installations in a nation Kenaman Port/Chukai appears to be the best fit for TNG’s announcements where energy prices are routinely capped to promote specific government-led economic goals. Short of a direct feed from a nuclear power plant or sitting on top of its own gas well, it is difficult to see a significantly more energy secure location.
Hardman Comment - When TNG states that the NT government is unable to provide assurances regarding energy security it is probably referring to the gas pipeline that skirts the Mount Peake property.
This pipeline runs between Darwin and Alice Springs, with some small aging gas fields along the way. With little hydrocarbon exploration being carried out the red centre there is little prospect of new fields coming online, which leaves Alice Springs as the only other substantial customer on the pipe. With the greatest respect to the town called Alice (popn ~25,000 and falling) it is not exactly an industrial hotspot, so it is entirely plausible that the burghers of the metropolis might decide to expand its existing megawatt scale solar park, compliment it with some energy storage and effectively take it off the gas grid by reducing gas consumption to near zero.
The Alice Solar City project, at AUD$42m the biggest single recipient of the Australian government’s AUS$94m ‘Solar Cities’ scheme, has only just finished and was supported by both the town and community. The town council aims to continue promotion of solar energy for Alice Springs so that solar energy used continues to rise from the current 4MW of PV supplying 3% of annual electrical needs (10% of peak daytime usage).
It's difficult to argue against the logic of using solar energy in Alice Springs, but in the longer term it leaves the pipeline infrastructure as vulnerable to underuse, and hence to price rises and closure. That isn’t too much of a problem for the Mount Peake mine itself, where diesel will be the dominant energy source as rock is dug, but for the processing plant and doubly so for any downstream ferrovanadium plant, grid power makes a real difference, all the way through the sizing of capital equipment to insurance risk of damage to equipment posed by variable quality power from site-based generators.
Since the Darwin-Alice pipeline is a commercially owned piece of infrastructure it can’t be forced to stay open and the NT government is effectively promoting its mothballing through the ambition for Alice Springs to become more energy independent. That leaves TNG with access to the hardware but stuck with a pricing and risk profile that is not acceptable for a long-lived project such as the Mount Peake processing plant.
So even without getting to the stage of commercial discussions over energy pricing NT energy policy is already impacting project decisions for TNG by imposing an unacceptable risk factor.
30 June 2014 27 Figure 5: Map showing major oil and gas fields off the east coat of the Malaysian peninsular. Source LNG World News website. (Sorry couldn't attach map. You will need to view it in the 30 June 2014 source doc.)
A Closer Look at the Neighbours
There is a major iron and steel works adjacent to the port but that fact alone doesn’t really tell the whole story for TNG. The Prewaja iron and steel works can produce 1.6Mt of DRI (sponge iron) per year as well as provide onward processing of 1.3Mtpa into specific rolled and billet steel semis for finishing by more specialised steel mills owned by its parent company Kinsteel Berhad or external customers overseas.
Obviously the production of vanadium steel is a primary market for TNG via a ferrovanadium semi, but the company’s iron oxide product could find a market as grade control material for Perwaja’s DRI production, a potential that we have previously discussed at reasonable length. If a deal can be struck with Prewaja the advantages of not having to transport 600,000 tonnes of finely powdered iron oxide significant distances may well benefit capital and operational economics for both parties. TNG’s output and Perwaja’s intake of iron are a good match with Perwaja’s needs being around double TNG’s planned output, and the high purity powdered form of TNG’s iron oxide should reduce Perwaja’s own energy and waste management costs compared with raw lump iron ore.
This leaves TNG’s titanium product. We note with interest that titanium dioxide pigment specialist Huntsman has a sulphate-route TiO2 plant at the Port of Kenaman. This is an extremely good fit for TNG’s ilmenite-heavy titanium concentrate and again having a 50,000tpa TiO2 production plant ‘on the doorstep’ cannot be a bad thing, but it isn’t currently big enough to consume all of TNG’s planned titanium concentrate and it is now a matter of record that GPP is working under an MoU to explore the marketing and distribution of TNG’s titanium. Of course this doesn’t preclude eventual product sales to Huntsman, but it does make it less likely that Huntsman will participate in the project.
Summary on Malaysia
The Kenaman industrial cluster seems to offer everything that TNG would need; a port capable of handling Panamax size vessels, brownfield industrially zoned land, an energy corridor with both electricity and gas, a local skills base used to heavy industry and commodities processing, a potential source of sulphuric acid (the oil refinery), two major market participants and possible customers, and an attractive investment climate.
There are structural issues though. Outside of specific locations with industrial backgrounds Malaysia suffers from a relatively low level of skills in its nonprofessional workforce and from a Brain Drain of those portions of its workers able to migrate. Up-skilling and worker retention are long-term projects that, according to the OECD in 2013, need to be backed by labour reform and increased participation by women in the workforce, as well as increased entrepreneurial activity through business start-ups.
The shift from command-control and towards a liberalised market is never painless but it normally provides sustained economic growth and Malaysia’s government seems to be committed to further industrialisation and economic uplift.
Tiger economy ? Dragon economy ? They may not be returning China’s >10% growth of the 2000s but Malaysia’s policies are publicly visible and the law is based on the UK’s. If you are looking for sustained growth, there are certainly worse places to scout.
As for being a location for TNG’s processing plant ? There can’t be many better equipped. We’re not going to speculate over any commercial terms that a Malaysian location may offer to TNG but even without any negotiated incentives the location has substantial advantages.
Risk in transportation is managed because the location away from the Malacca Straights (one of the globe’s great strategic hotspots) ensures access to the Pacific Basin and the Atlantic via Panama. • Markets to the east (Chain, Japan, Korea, USA, etc.) and to the west (India, Middle East, Europe) are acceptable distances because of the size of vessel that can be accommodated by the port.
Western, Japanese and Korean political concerns over the security of supply chains of strategic minerals are mollified because Malaysia is neither in the Chinese sphere or the Russian, but nor is it in the American sphere.
The population crosses cultural barriers with affinities in the Muslim world, the Chinese and Indian, as well as having strong connections to the UK and Australia.
The regional-scale power plant in the area and adjacency to pipelines landing offshore gas mean that energy supply should be very secure for the next 30 or so years.
The list goes on. There are obviously commercial details that need to be resolved but in general terms we’re sold on Malaysia as a potential location for TNG’s TiVAN™ processing plant. Whether Kenaman Port is the final location for TNG’s"
So, there it is. It's the reason why I would support the Tivan Refinery being in Malaysia...but we need a manufacturing licence to be issued!
IMO, If you invest your hard earned, you have to do the research.
Cheers to all.
Jvest
TNG Price at posting:
19.0¢ Sentiment: Hold Disclosure: Held
