Heavy industry is set to be a major player in the state’s future

 

As Malaysia’s largest state, making up around 40% of the country’s total land mass, Sarawak stretches over an area of 124,449 sq km and occupies 320 km of coastline, endowing it with large plots of land that can be allocated for industrial development with import and export facilities. The Sarawak Corridor of Renewable Energy (SCORE) is one of five regional development corridors taking place throughout Malaysia. Within SCORE there are five designated new growth nodes, each adopting a different investment proposition.

The Mukah growth node will be developed into a smart city, Tanjung Manis into an industrial port city and halal hub, while Barum and Tunoh will each focus on tourism and resource-based industries. The most advanced of the growth nodes also has the most pronounced industrial aspirations: the Samalajau Industrial Park (SIP), focused on attracting energy-intensive industries that need bulk port facilities.

ENERGY RESOURCES: SCORE is estimated by the Regional Corridor Development Authority (RECODA), the agency tasked with overseeing and managing its development, to contain 20,000 MW of hydropower potential, 1.5m tonnes of coal reserves and 40.9trn sq cu ft (scf) of natural gas. A significant portion of the available energy mix is concentrated near to the district of Bintulu, in which the SIP is situated. This proximity to energy and mineral resources, along with a coastal location suited to constructing a large deep-sea port facility, makes SIP the ideal location for attracting heavy industry. “There are not many places in the world where hydropower is available near consumers and where hydro plants can be located in areas which do not require long transmissions lines in order to be accessible,” Paul Koon, the group CEO of Press Metal, a SCORE investor and aluminium producer, told OBG.

Of the 19 projects worth RM32bn ($9.7bn) that have been approved within SCORE to date, the majority – 15 worth RM27bn ($8.2bn) – have taken up occupancy within the SIP, with each of these acting as a trigger for investments into one of the four key industrial clusters set aside to cover non-ferrous materials ( aluminium, zinc, manganese), iron and steel, silica (solar panels, solar cells, polysilicon, glass) and petrochemicals (refineries, chemicals and other liquids).

ALUMINIUM: By 2020, it is estimated that 25m tonnes of new aluminium capacity will be needed globally, and that much of the demand will come from fast-growing Asian markets experiencing booms in their automotive manufacturing, construction, real estate and electrical sectors. China alone was responsible for nearly half the global consumption of primary aluminium in 2013.

The various industries that the SIP has opted to attract are notable for their downstream potential and finished primary aluminium-based products, including packaging materials, tyre frames and kitchen utensils. According to the SCORE blueprint, the state aims to become South-east Asia’s largest producer of aluminium and it is hoped that by 2030 the industry will create 10,800 jobs and contribute $5.5bn to state GDP.

Malaysian company, Press Metal, established Southeast Asia’s first aluminium smelting plant in Mukah in 2009. The facility, which has a production capacity of 120,000 tonnes per annum (tpa), was complemented two years later by a far larger Press Metal plant in Samalajau that, at 320,000 tpa, has 2.6 times the production capacity. Following a 2014 re-commissioning of both plants, Press Metal has stated that its collective production will reach 405,200 tonnes for 2014 and 435,600 tonnes in 2015, compared to 290,772 tonnes in 2013. The only other smelter in the region is a 265,000-tpa facility in Indonesia. As a testament to the energy intensity smelting entails, the Mukah plant’s purchasing power agreement (PPA) covers 200 MW of electricity and the Samalajau plant 500 MW. In 2014, Japan’s Sumitomo Corporation purchased a 20% stake in the Samalajau smelter for $140m, and as part of the deal, it is entitled to purchase aluminium ingots and billets produced by the smelter at market rates.

REAL STEEL: Sumitomo’s non-ferrous interests at the SIP also extend to manganese, as the conglomerate holds a 17% stake in a consortium that is building and managing a smelting plant that will produce manganese alloy for sale across Asia. Other members of the consortium, incorporated as Sakura Ferroalloys, include South African miner Assmang and Taiwan’s China Steel Corporation. Construction on the $328m 169, 000-tonne plant began in mid-2014 and operations are expected to commence in the late 2015. The power purchase agreement with the Sarawak Electricity Supply Corporation (SESCO) is for 80 MW.

PARTNERING UP: Another joint venture project delivering on the state’s ambitions to become a ferroalloy production centre is OM Material Sarawak (OMS), a partnership formed between Singapore’s OM Holdings and Cahya Mata Sarawak (CMS). OMS is constructing a $592m smelting plant with first phase production capacity, scheduled for the end of 2014, of 308,000 tpa of ferrosilicon alloys, and second phase production, targeted for mid-2015, of 265,000 tpa of manganese ferroalloys and 300,000 tpa of manganese sinter ores. A 20-year agreement with Sarawak Energy for the supply of 500 MW of power has been signed.

The CEO of OM Holdings, Peter Toth, told OBG the company chose Sarawak as an investment destination over a shortlist that also included China and Indonesia, with the former losing out over concerns of rising costs and export restrictions, and the later evaluated as being too bureaucratically complex. In all, Toth praised the experience so far and said he was closely monitoring of the progress of Samalajau Port, set to become operational in 2016. For the time being, mined Manganese shipped from Australia’s Northern Territory is arriving through Bintulu Port and from there it has to be trucked some 95 km to the smelter, which is not logistically optimal. Manganese alloy is a key input in improving the strength and resistance of steel, and RECODA is betting that the two smelters will trigger further downstream investment into a direct reduced iron steel mill that produces high-quality hot and cold rolled coil that could then feed even further into the manufacture of finished automotive parts and building materials. By 2030, the authorities believe a local steel industry could create 7200 jobs and provide $1bn to GDP.

“Japanese companies are investing in the Asian steel industry, as they are constantly looking to find the cheapest raw materials,” Victor Hii Liu Thian, president of steel manufacturer YKGI Holdings, told OBG. “These companies are increasing their shares in Malaysian firms and helping the steel industry to grow.”

POLYSILICON: The most recent investor to have launched operations in the SIP is Japan’s Tokuyama, with a polycrystalline silicon manufacturing facility that began construction in early 2011 and saw its first phase of production come on-line in 2014. According to the company, the RM8bn ($2.4bn) total investment will eventually cover 70 ha of land and result in the employment of 707 direct staff and an additional 1050 people employed indirectly as service providers.

Tokuyama, in a presentation released to OBG, indicated that its decision to select Sarawak as the destination for its only factories outside of Japan was based on two criteria: first, the ease of securing the necessary resources, as producing polycrystalline silicon relies on large volumes of electricity and industrial water, as well as a highly educated workforce; and second, the preferential treatment afforded them by the state government, which included favourable taxation agreements and easy access to permits and licences. Saudi Arabia’s Project Management & Development Company (PMD) is set to soon join Tokuyama in the silica cluster, announcing in 2013 plans for a $1.6bn polysilicon manufacturing plant that will be owned and operated by its Malaysian affiliate, Cosmos Petroleum & Mining.

In terms of end-use applications, polycrystalline silicon is a key input in the manufacture of semiconductor silicon wafer used in integrated circuit chips and electronic devices, as well as in solar cells and power panels. Demand for the material is expected to grow across the region as the production of tablets and smartphones increases. “Through associations such as the Sarawak Electronics and Associated Companies Association, firms that have already invested in Sarawak’s electronics and electrical industries are working with relevant government bodies to create additional incentives aimed at attracting new industries to Sarawak within the solar and electrical segments,” Mike Young, CEO of semiconductor foundry X-FAB Sarawak, told OBG.

Looking forward, RECODA is hoping to add an investor to the cluster interested in building a float glass unit to produce high-end glass products to gain synergies with the potential for downstream spin-off activities from glass, such as automotive window parts and construction components, and align with those of an integrated steel industry. In all, a local glass industry could create 2100 jobs by 2030 and be worth $400m.

CHEMICALS: The first non-metal or alloy-based plant in SIP will be a RM1bn ($316.4m) integrated phosphate complex that is said to the first of its kind in South-east Asia. Construction on the 500,000-tpa-capacity complex began in 2014 and the first phase operations are expected to begin in early 2016, while full commissioning is anticipated during the second quarter of 2018. The complex will be 40% owned by each of CMS and Malaysian Phosphate Venture, with the remaining 20% held by Arif Enigma. The consortium has signed a PPA term sheet with SESCO for 150 MW.

With large reserves of offshore natural gas, Sarawak possesses a key ingredient needed to kickstart a local petrochemicals value chain. RECODA is looking to looking to attract independent refineries, tank farms trading in oils and liquids, and downstream petrochemicals production involving gas-based methane into the SIP. By 2030, the objective is to have the petrochemicals industry create 6200 jobs and contribute $3.5bn to the state GDP, with China expected to play a large role as the recipient of two-thirds of state petrochemicals exports. In December 2014, a memoranda of understanding was signed with South Korea’s Huchems Fine Chemical Corporation to set up an ammonia plant, a move that the authorities hope will trigger other opportunities and be the first of many towards establishing Sarawak as a key link in the global petrochemicals chain.

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The Report: Sarawak 2015

Industry & Retail chapter from The Report: Sarawak 2015

The Report: Sarawak 2015

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