[TMI] Economists sceptical of Lynas plant multiplier effect

A file picture of the Lynas plant in Gebeng under construction March 19, 2011. — Picture by Choo Choy May

KUALA LUMPUR, May 25 — Economists doubt Lynas Corp’s claim that its Kuantan rare earth plant will have a tenfold multiplier effect as its regional economy impact is limited.

Pahang welcomes the RM700 million refinery which the Australian mining giant said earlier this month will create an annual RM4 billion multiplier effect and turn the Gebeng industrial zone into the centre of a “rare earth ecosystem”.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said multiplier effect for industrial projects usually range from 1.2 to 1.4 times, depending on the extent of upstream and downstream “inter-industry linkages”.

“You’re basically taking the raw material from Australia and producing rare earth,” he told The Malaysian Insider.

He pointed out commodities-based operations like the rare earth plant usually yielded lower multiplier effects as there was little need for locally-manufactured parts and components.

But Yeah added the multiplier effect depended on employment generated by the plant and conceded that the income multiplier could be stronger if the capital labour intensity of the plant was “reasonably high”.

“It’s a high-value commodity so it could be possible, and the value-added is also high,” he said.

Kuantan residents examine the government’s point of view before a town hall meeting to discuss the Lynas plant in Kuantan, April 5, 2011. — Picture by Jack Ooi

In a video posted on the Lynas Facebook page on May 9, executive vice president Matthew James said the company will pour an initial A$350 million (RM1.1 billion) into the first phase of its Lynas Advanced Materials Plant (LAMP) before an ongoing annual expenditure of A$130 million.

“Given the business ecosystem and multiplier effect of that, that’s equivalent to generation of about A$1.3 billion worth of turnover in the region,” he said, applying a tenfold multiplier effect.

“Advanced chemical companies are looking to locate or co-locate around a stable, long-term, secure, safe supply of rare earths and there is already interest from customers in this aspect.”

LAMP will require 350 skilled workers, including senior leadership positions, Lynas has said, adding that 99 per cent of those employed will be Malaysians.

OSK Research head of research Chris Eng, however, said the plant will be highly automated like aluminium and manganese smelting plants, and described the project as a “low employment yielding business” that would have limited impact on the local economy.

He said this was particularly true of the rare earth plant as the raw materials would be imported from Australia and the finished product exported overseas.

“It (the plant) continues with this exploitation of Malaysia’s national resources to provide cheap utilities to low value-adding industries,” he said, pointing out that Lynas only set up shop here to take advantage of cheap gas, water and land.

The Pahang state representatives explain the project to residents in Kuantan, April 5, 2011. — Picture by Jack Ooi

JP Morgan economist Matthew Hildebrandt was equally doubtful of the tenfold multiplier effect claim, pointing out that to do so the plant would have to “create a lot of business elsewhere”.

“My gut feeling is ten times is a pretty big number,” he said.

“The bigger the output of that factory… the more spill-over they have to have.”

OSK-DMG regional economist Enrico Tanuwidjaya said that while the multiplier effect could be as high as seven to eight times, much depended on how the government handles opposition to the plant.

“The local opposition means it might not go as smoothly,” he said, adding that political opposition will not be easy to resolve.

But he added that the project should benefit Malaysia “regardless of multiplier” if it was part of the Najib administration’s efforts to broaden the country’s growth base away from exports under the Economic Transformation Programme (ETP).

“I think for Malaysia itself, it should be positive if the political consideration can be resolved,” he said.

A Geiger counter and rare earth samples displayed outside a town hall meeting to discuss the Lynas plant in Kuantan, April 5, 2011. — Picture by Jack Ooi

The government estimates investment spinoffs of RM2.3 billion from the plant that will be operable in September after over two years of construction.

Science, Technology and Innovation Minister Datuk Seri Maximus Johnity Ongkili told Parliament last month that RM300 million has already been poured into two factories in Gebeng that will produce the hydrochloric and sulphuric acid needed to extract the rare earth metals.

But critics have questioned the real economic benefit of the project despite reports that the plant may generate up to one per cent of national GDP, citing the 12-year tax holiday Lynas is set to get as a pioneer status company.

The government has agreed to set up a panel headed by the International Atomic Energy Agency (IAEA) to review LAMP’s operations following mounting criticism from green groups here and in Australia.

Lynas has assured that the month-long review will not disrupt the plant’s scheduled September start date.

The company declined to comment on the multiplier effect despite repeated requests fromThe Malaysian Insider.

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