I rarely care enough to think about domestic issues in Malaysia, but a severe bout of college “senioritis” has led me to this intellectual exercise. My attention is turned to Lynas, an Australian mining company that plans to set up a rare earth refinery plant in Gebeng, Pahang. At this juncture, the core of the dispute appears to be the refinery’s impact on public health and the environment. With the government’s decision to grant Lynas a Temporary Operating License, this issue has never been more politically-charged. I am going to “conveniently” ignore the health/safety dimension here, not because it is unimportant, but because there is little to add to a technical discussion that remains unresolved even among the experts. It is probably more fun to poke into the economics of the issue.
So how does Lynas justify the refinery plant economically? From the onset, it attempts to impress with big numbers. According to Lynas, the RM700mn operations will turn Gebeng into a major rare earth hub – one that is projected to meet a third of the global demand for rare earth materials within 2 years. By attracting advanced chemical companies to set up shop near the refinery, Lynas also claims a regional multiplier effect of at least tenfold. This would ideally spark the virtuous cycle of job creation, asset reflation, and capital reinvestments. Perhaps the biggest revelation is this – the refinery’s annual export is estimated at over RM5bn, a cool 1% of the nation’s GDP! Surely, that would be a huge boost to our aspiration to become a high-income nation by 2020. Has Christmas come early for Malaysia?
Well, I have my reservations. One crucial caveat to note is that Lynas secured a fat 12-year tax break from the government for the refinery. This represents billions of lost corporate tax revenues over the next decade – tax revenues that could have helped build infrastructure for complementary industries or lower income/sales taxes that affect Malaysians more directly. More importantly, this tax exemption substantially curtails our opportunity to raise income per capita via Lynas. The firm now gets to retain all of its earnings, which when repatriated back to its home country, actually contributes to the Gross National Income (GNI) of Australia, not Malaysia. One may easily conflate between the two, but GNI is the indicator (not GDP) that gauges our progress towards hitting the USD15000 per capita target by 2020. While it contributes to domestic output, foreign direct investment does not necessarily create localized wealth effects, especially if the government forgoes a chunk of the firm’s capital returns.
What about employment then? Doesn’t the refinery plant create jobs for its surrounding community? Yes, but only on a small scale. The refinery plant, also dubbed as the Lynas Advanced Materials Plant (LAMP), requires only 350 skilled workers. Compared to the thousands of livelihood that might be at stake, this figure is miniscule. Not to mention, rare earth refining lies relatively low in the sector’s global supply chain, preceding more value-adding activities such as R&D and manufacturing. The upside is no different from that of helping Intel or Dell to assemble chips and laptop computers. The downside however, is potentially daunting. Since our engagement with Lynas is in the commodities sector, the financial health of the refinery is susceptible to the fluctuations in the price of rare earth minerals. The fact that rare earth minerals are traded in private markets, instead of exchange-traded markets makes price monitoring and hedging activities even more difficult.
And now to the extraordinary claim that the Gebeng refinery would generate a tenfold multiplier effect. This projection substantially exceeds the baseline projections of typical industrial projects, which usually range from 1.2 to 1.4. Unless Lynas can single-handedly create a thriving, mega cluster of suppliers, competitors and consumers, in other words – a Silicon Valley of rare earth players in Malaysia, I am skeptical of the refinery’s multiplier effect. Indeed, commodities-based operations usually yield lower multiplier effects due to the little need for locally-manufactured components. Besides, the industry for rare earth processing and manufacturing barely exists in Malaysia. It is hard to imagine then, how new industry players could converge in the Gebeng locality, considering the potential lack of core competencies and other barriers to entry into the industry. If anything, Lynas would probably be vertically integrated throughout its refinery operations and operate alone in the area.
Based on my personal analysis, the economic benefits of setting up the refinery plant appear to be exaggerated. Then again, economics is a game of assumptions. One could always justify the construction of the refinery by tinkering with a favorable set of counterfactuals. The point is – conceptually at least, building that plant may not be a good idea.
 A dramatic loss of academic motivation that plagues graduating university students, caused by the possible illusion that one’s CGPA is (pretty much) set in stone and/or a premature anticipation to post-graduation plans, for better or for worse.