Economic analysis of LAMP: more precious than rare earths

Posted on September 10, 2011 · Posted in Blog

Introduction

A project by the Australian rare earths mining company Lynas Corporation Ltd was recently brought to the attention of Economists at Large.  Lynas are constructing a processing plant for rare earths in Malaysia.  Lynas refers to this plant as the Lynas Advanced Materials Plant or LAMP.

 

The project has come up against opposition from local groups who accuse Lynas of cost cutting practices in building the refinery. The accusations are predominantly based on a report by the New York Times which claims that there are cracks in the containment tanks and Lynas is using lesser quality materials such as plain steel instead of stainless for its piping, (Bradsher, 2011).

 

Local residents are concerned that radioactive waste from the facility will put them at risk and potentially leave a costly legacy. Locals fear a repeat of the toxic wasteland left behind by the Mitsubishi Chemical plant in Bukit Mesah which is now blamed for birth defects and cancers such as leukaemia.  Lynas claims that the radioactive thorium content of their rare earths oxide (REO) is very low and that the plant won’t pose a risk.  Despite this, a recent review by the International Atomic Energy Agency recommended that Lynas develop a more thorough waste management plan.  The plan was due by August 2011 and as far as we’re aware, has not yet been released.

 

Lynas will export the rare earths material from its mine at Mt Weld in Western Australia. The mine is situated 35 km from Laverton in WA and it will be the first new source of supply of RE outside China in more that two decades, supplying 8% of the world’s rare earth market, (Latimer, 2011). The Mt Weld project is estimated to have a life span of 20 years producing 33 000 tonnes per annum of RE concentrates, (Latimer, 2011).

Economic assessment of LAMP

When Economists at Large first read about community concerns, we figured that Malaysians should at least be getting some significant economic benefits from the project.   We went looking for an economic assessment of the project.  For a project of this scale and with such community and environmental concern, a company in Australia would nearly always have to include economic assessment, typically as part of an environmental impact assessment (EIA).

 

Socio-economic impacts section of preliminary environmental impact assessment for LAMP

The only formal assessment we could find was released back in 2008, as part of a “Preliminary Environmental Impact Assessment and Quantitative Risk Assessment”.  Section 8.8 of this report looked at the socio-economic impacts of the plant.  The report included just four paragraphs discussing economic impacts of the project and can essentially be summarised as follows:

  1. Construction impacts: Jobs will be created for locals where possible.  Foreign workers will be used if a local workforce is not available or sufficient.
  2. Operational impacts: The project will have positive socio-economic impacts at a regional and national level.

For those interested in how not to do a socio-economic impact assessment, the relevant section (above) from the original report makes for instructional viewing.

 

No quantification of the impacts at either construction or operational stages was given.  Since 2008, media sources and company documents have shed some light on more specific economic impacts.

The table below is a list of figures relevant at each stage of the project:

 

CONSTRUCTION IMPACTS

Value Unit Area Source
$237.32 AUD millions Phase 1 – capital costs for LAMP (Lynas, 2011a)
$65.24* AUD millions Phase 1 – other capex including land in Malaysia (Lynas, 2011a)
$148.0 AUD millions Phase 2 – plant & equipment for the LAMP (Lynas, 2011a)
$63.9 AUD millions Phase 2 – LAMP operational, working capital and production ramp-up from Phase 1 (Lynas, 2011a)
50+ Jobs Phase 1 – jobs in “Malaysian Operations” team (Lynas, 2010)
2500 Jobs Construction employment

* (Lynas, 2010) (p.56) states that AUD $62.154 million was spent across 2009 and 2010 on leasehold land and for Malaysia, it includes two leases expiring in 2099 and 2106 respectively.  It is unclear how much of the AUD $62.154 million is for land purchased in Australia or whether this is all for the site in Gebang, Malaysia.

 

OPERATIONAL IMPACTS

$130 AUD millions Ongoing annual operating costs (Lynas, 2011b)
350 Jobs Ongoing employment (Lynas, 2011b)

Tax concession for LAMP

Perhaps the biggest surprise to us when we looked at this project was the 12 year tax exemption granted to Lynas in Malaysia.  Corporate tax revenue is one of the clear benefits of increased private sector activity in a country.  By granting a tax holiday to Lynas, the Malaysian government has given up significant revenue.

 

Lynas Malaysia Sdn Bhd has been granted a 12-year tax exemption for ‘pioneer status’, (Lynas, 2011a).  The Ministry of Finance Malaysia lists five different categories for Pioneer Status (PS):

a)     Promoted product/activity

b)     Promoted product/activity in promoted area (Pahang is listed as a promoted area)

c)     Promoted product/activity for high technology companies

d)     Promoted product in an approved industrial linkage scheme (SMIs producing intermediate goods)

e)     Promoted product/activity of national and strategic importance including the MSC status companies and product/activity in the approved linkage programme which achieve world class status.

f)      Contract Research and Development company (R&D)

Source: (Ministry of Finance Malaysia, 2011)

Based on the list above, the closest category we can identify that explains a 12-year tax exemption for Lynas is category e).  This category allows for a maximum 10 years tax exemption and states that:

 Company will be granted full tax exemption on 100% of the statutory income for 5 years and is eligible for extension for another 5 years.

Source: (Ministry of Finance Malaysia, 2011)

 

This indicates that the Malaysian Government views the Lynas project as one of national and strategic importance.  Another reason for the tax exemption may be due to the creation in 2009 of a Special Economic Zone (SEZ) in the East Coast Economic Region (ECER) of Malaysia.  Pahang is included in this region and “resource-based downstream manufacturing” is a focus area for the State, along with Infrastructure & Transport, Tourism, Agriculture and Education, (East Cost Economic Region Development Council, 2011).  It is unclear where the two additional years of tax exemption (above and beyond the 10 year maximum for the pioneer status) come from but it may be related to the plant being in the SEZ.

Recommendations

To properly understand the benefits – not just the impact – of the LAMP on the Malaysian economy, a more rigorous analysis of the economics of foreign direct investment and special economic zones, as well as more detailed plans for waste management, are required.  We have not carried out such analysis yet, nor are we aware of such analysis by the Malaysian government or Lynas Corporation. Despite this, some lessons can be learnt from this project.

 

For the Malaysian government, we recommend that:

  • the process for granting tax exemptions be made more transparent, with more thorough cost benefit analysis of a particular project required to justify any tax exemption.
  • projects with potentially significant environmental risks, or of high community sensitivity, should be subject to more thorough economic cost benefit analysis.

 

For Lynas, if they are serious about community engagement, they should start by publishing a more thorough report on the economic impacts of the project.  This would not be a substitute for more useful cost benefit analysis of the project, but would at least serve to provide a starting point for assessment.

Conclusions

In a global market for rare earths, there seems little reason why locating the LAMP in Malaysia confers any benefits to downstream industries.  Industry agglomeration could be achieved through supporting policy measures or through government investment in rare earths projects, in return for guaranteed supply.  The latter strategy is exactly what Japan has chosen to do, (Winning, 2011).

 

As Malaysia strives to escape the “middle income trap”, (Schuman, 2010), it needs to reduce it’s reliance on investment and job creation based on ‘low cost’ and ‘low regulation’ advantages.  Malaysia also needs to increase the economic scrutiny of projects that are simply assumed to have economic benefits, when actual benefits may be more rare.

References

Bradsher, K. (2011, March 8). Taking a Risk for Rare Earths. The New York Times. Retrieved from http://www.nytimes.com/2011/03/09/business/energy-environment/09rare.html?pagewanted=all

East Cost Economic Region Development Council. (2011). East Coast Economic Region : Master Plan : Overview – Project Focus By State (Pahang). Retrieved August 26, 2011, from http://ecerdc.com/ecerdc/masterplan7c.htm

Latimer, C. (2011, August 5). Mt Weld Rare Earths Mine Officially Opens. Australian Mining. Retrieved from http://www.miningaustralia.com.au/news/mt-weld-rare-earths-mine-officially-open

Lynas. (2010). Lynas Annual Report 2010.

Lynas. (2011a). Investor Presentation. Journal of Rare Earths (Vol. 24). May 2011. doi:10.1016/S1002-0721(07)60001-5

Lynas. (2011b). Lynas Malaysia – How the building of the LAMP in Malaysia would benefit Malaysians? Retrieved from http://www.youtube.com/watch?v=rhPcekFzp1c

Ministry of Finance Malaysia. (2011). Pioneer Status (PS). Retrieved from http://www.treasury.gov.my/index.php?option=com_content&view=article&id=704&Itemid=201&lang=en

Schuman, M. (2010, August 10). Escaping the middle-income trap. TIME. Retrieved from http://curiouscapitalist.blogs.time.com/2010/08/10/escaping-the-middle-income-trap/

Winning, D. (2011, September 2). Lynas locks in supply deal with BASF. The Australian. Retrieved from http://www.theaustralian.com.au/business/mining-energy/lynas-locks-in-supply-deal-with-basf/story-e6frg9df-1226127896922

 

Links and more info 

www.lynascorp.com

www.stoplynas.org

http://www.savemalaysia.org/

http://www.badarstoplynas.com/

 

Note on this research

Figures contained in this analysis came from a variety of sources.  If any stakeholders read this blog post and wish to correct any figure or statement above, please comment on this blog directly or contact us.
 

Post edits

  • Edited on 12 September: Updated details about tax concession to highlight that the maximum under the pioneer status is only 10 years.