Malaysia Petro

2010www.businessmonitor.com

petrochemicals report

issN 1749-2335published by Business monitor international ltd.

malaYsiaINCLUDES 5-YEAR FORECASTS TO 2014

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Malaysia Petrochemicals Report 2010 Including 5-year industry forecasts by BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: December 2009

Malaysia Petrochemicals Annual Report 2010

© Business Monitor International Ltd Page 2



CONTENTS

Executive Summary .........................................................................................................................................5

SWOT Analysis.................................................................................................................................................7

Malaysia Petrochemicals Industry SWOT.............................................................................................................................................................. 7 Malaysia Political SWOT ...................................................................................................................................................................................... 8 Malaysia Economic SWOT .................................................................................................................................................................................... 9 Malaysia Economic SWOT Analysis ...................................................................................................................................................................... 9

Global Market Overview.................................................................................................................................10

Global Petrochemicals Overview ........................................................................................................................................................................ 10 Table: World Ethylene Production By Country, 2009 And 2014 (‘000 tonnes capacity) ..................................................................................... 10 Table: World Petrochemicals Capacities, 2009 (‘000 tpa) .................................................................................................................................. 14 Global Oil Products Price Outlook...................................................................................................................................................................... 19 Table: Oil Product Price Assumptions, Q108-Q409 (US$/bbl)............................................................................................................................ 21 Table: Oil Product Prices, 2007-2014 (US$/bbl) ................................................................................................................................................ 22

Emerging Asia Petrochemicals Overview ...................................................................................................23

Table: Asian Ethylene Projects............................................................................................................................................................................ 25

Malaysia Market Overview.............................................................................................................................26

Table: Malaysia’s Olefins Facilities, 2008 .......................................................................................................................................................... 27 Table: Malaysia’s Aromatics Facilities, 2008 ..................................................................................................................................................... 28 Table: Malaysia’s Polyolefins Facilities, 2008.................................................................................................................................................... 28 Key Petrochemical Products................................................................................................................................................................................ 29 Plastics ................................................................................................................................................................................................................ 29 Regulatory Structure............................................................................................................................................................................................ 29

Industry Trends And Developments ............................................................................................................31

Upstream ............................................................................................................................................................................................................. 31 Liquefied Natural Gas ......................................................................................................................................................................................... 32 Recent Developments........................................................................................................................................................................................... 33 Emergence Of Petrochemicals Zones .................................................................................................................................................................. 35 Table: Malaysia Petrochemical Plants ................................................................................................................................................................ 36

Business Environment ..................................................................................................................................38

Asia Petrochemicals Business Environment Ratings............................................................................................................................................ 38 Table: Asia Pacific Petrochemicals Business Environment Ratings .................................................................................................................... 38 Limits Of Potential Returns.................................................................................................................................................................................. 39 Risks To Realisation Of Returns .......................................................................................................................................................................... 39 Malaysia’s Business Environment Outlook.......................................................................................................................................................... 40 Table: BMI's Asia Pacific Business And Operational Risk Ratings ..................................................................................................................... 41 Table: BMI's Asia Pacific Legal Framework Ratings .......................................................................................................................................... 43 Table: Annual FDI Inflows Into Asia, 2006-2008................................................................................................................................................ 48 Table: BMI's Asia Pacific Trade Ratings............................................................................................................................................................. 50 Table: Malaysia’s Top Export Destinations, 2001-2008 (US$mn) ...................................................................................................................... 51

Industry Forecast Scenario...........................................................................................................................53

Table: Malaysia’s Petrochemicals Sector, 2007-2014 (‘000 tpa, unless otherwise stated).................................................................................. 54 Macroeconomic Outlook...................................................................................................................................................................................... 55



Table: Malaysia – Economic Activity, 2o07-2014 ............................................................................................................................................... 57

Company Monitor...........................................................................................................................................58

Petronas............................................................................................................................................................................................................... 58 Titan Chemicals................................................................................................................................................................................................... 60 BASF.................................................................................................................................................................................................................... 63 Dow Chemical ..................................................................................................................................................................................................... 64 BP........................................................................................................................................................................................................................ 65

Country Snapshot: Malaysia Demographic Data........................................................................................66

Section 1: Population........................................................................................................................................................................................... 66 Table: Demographic Indicators, 2005-2030........................................................................................................................................................ 66 Table: Rural/Urban Breakdown, 2005-2030 ....................................................................................................................................................... 67 Section 2: Education And Healthcare.................................................................................................................................................................. 67 Table: Education, 2000-2003 .............................................................................................................................................................................. 67 Table: Vital Statistics, 2005-2030........................................................................................................................................................................ 67 Section 3: Labour Market And Spending Power .................................................................................................................................................. 68 Table: Employment Indicators, 2001-2006.......................................................................................................................................................... 68 Table: Consumer Expenditure, 2000-2012 (US$)................................................................................................................................................ 68 Table: Average Annual Manufacturing Wages, 2000-2012 ................................................................................................................................. 69

Methodology ...................................................................................................................................................70

How We Generate Our Industry Forecasts .......................................................................................................................................................... 70 Chemicals And Petrochemicals Industry ............................................................................................................................................................. 70 Cross Checks ....................................................................................................................................................................................................... 71 Business Environment Ratings............................................................................................................................................................................. 72 Table: Petrochemicals Business Environment Indicators And Rationale............................................................................................................. 72 Weighting............................................................................................................................................................................................................. 73 Table: Weighting Of Indicators ........................................................................................................................................................................... 73



Executive Summary

The Malaysian petrochemicals industry is set to take advantage of the regional economic recovery in

2010 following expansion in methanol, propylene and polypropylene (PP) capacities in 2008, but it will

face a tough competitive environment as China ramps up its own capacities, according to BMI’s latest

Malaysia Petrochemicals Report.

In 2009, Malaysian petrochemicals capacities remained unchanged from the previous year. In the olefins

segment, the country had capacities of 1.74mn tpa ethylene, 1.13mn tpa propylene and 100,000tpa

butadiene. Intermediate petrochemicals production capacities include 240,000tpa styrene, 440,000tpa

vinyl chloride monomer, 550,000tpa xylenes and 380,000-385,000tpa ethylene oxide/ethylene glycol

(EO/EG). In the polymers segment, there was 975,000tpa polyethylene (PE) (120,000tpa high density PE

(HDPE), 475,00tpa low density PE (LDPE) and 380,000tpa linear low-density PE (LLDPE)), 560,000tpa

PP, 260,000tpa polyvinyl chloride (PVC), 215,000tpa polyethylene terephthalate (PET) and 140,000tpa

polystyrene (PS). In the fertiliser segment, Malaysia has capacities of 1.32mn tpa ammonia and 1.34mn

tpa urea. It also hosts 1.77mn tpa of methanol capacity, with Petronas subsidiary Petronas Methanol

(Labuan) dominating the market following the completion of its massive methanol complex in Q308. The

same year saw PP capacity increase 100,000tpa at Titan Chemicals’ site at Pasir Gudang, Johor. There

are few major expansions in the Malaysian petrochemical sector planned over the next five years. BMI

does not envisage an increase in ethylene and polymer capacities over the forecast period.

Increased productivity and expansion in industry output over recent years have resulted in improved

export performance. Malaysia continues to attract foreign investment, but the industry is reassessing its

competitive status within the ASEAN and the ‘threat’ posed by China’s rapid industrial expansion. The

petrochemical industry is facing tougher market conditions with falling product prices, slowing demand

growth and a massive increase in capacities in Asia and the Middle East. In order to sustain production

volumes, Malaysian producers will need to constrain feedstock costs. In the face of intensified

competitiveness in the global market, prospects for the Malaysian petrochemicals industry depend on its

ability to cultivate and maintain competitive advantages over other competing nations.

In the short term, overcoming feedstock shortages and mechanical hitches are likely to be at the forefront

of operators’ agendas. The utilisation of the country’s considerable ethane reserves is crucial to

maintaining competitiveness. This will be bolstered by the development of its LNG sector. The use of

naphtha as feedstock has resulted in unstable feedstock prices, and thus affected petrochemical demand in

the domestic market. Such a situation will continue until the prices stabilise, in spite of the vast domestic

reserves that Malaysia holds.

Malaysia ranks seventh place in BMI’s Petrochemicals Business Environment Rankings for Asia with

63.4 points. While it has a significant petrochemicals production base, it lags behind in terms of



infrastructure. Nevertheless, oil and gas reserves should sustain some expansion of the country’s

petrochemicals sector over the next decade.



SWOT Analysis

Malaysia Petrochemicals Industry SWOT

Strengths Rich oil and gas reserves

Tax incentives available to petrochemical investors

Proven ability to attract foreign investment

Well-developed infrastructure

Highly skilled workforce

Strategic location within the Association of Southeast Asian Nations (ASEAN) and proximity to major Far East markets

Integrated petrochemical complexes

Weaknesses Lack of feedstock economy advantages compared to competitors such as Thailand

Sub-par capacity utilisation in several segments

Opportunities Petrochemical manufacturers based in Malaysia likely to benefit from the ASEAN Free Trade Agreement (AFTA) and from the access to a much larger Asia Pacific market

Growing demand for styrene butadiene in Malaysia

Interest in Malaysia’s oil and petroleum sector has been growing due to its strategic location; this is expected to aid development of other ancillary industries as well

China’s entry into the WTO is expected to create business opportunities for petrochemicals manufacturers in Malaysia

Threats Increased international competition as Malaysia is committed to AFTA and the ASEAN Investment Area (AIA)

Proposal of reduction in Preferential Resin Tariff from 10% to 5% may send wrong signals to the investors in the petrochemicals segment

The entire Asian petrochemicals industry is threatened by rising feedstock prices and increased capacity build-up in Middle East



Malaysia Political SWOT

Strengths Malaysia is a successful example of a democratic Islamic state. Despite murmurs of discontent among hard-line Muslims in some states, Malaysia is unlikely to abandon moderate Islam

Despite having two other significant minority races (Chinese and Indians), Malaysia has not been rocked by any major racial unrest since 1969, lending credence to its sustainable multi-racial society

Weaknesses The Malay half of the population holds a constitutionally enshrined special position in society, amounting to positive discrimination in not only jobs, but also wealth. Resentment is an obvious by-product, and the challenge is to produce enough prosperity to reduce tension

The controversial Internal Security Act (ISA) - which allows for detention without trial - has been wielded by the government on several occasions with the explicit reason to quell unrest. However, some detentions have been viewed as an attempt by the government to suppress the opposition

Opportunities The relatively weak performance by the ruling Barisan Nasional (National Front) in the general elections held on March 8 2008, has paved the way for the stalled reformist agenda - promised by former Prime Minister Abdullah Ahmad Badawi back in 2004 - to gather pace. This would help to open up the country's closed political system and improve transparency and accountability within key institutions

Newly-appointed Prime Minister Najib Razak came into power promising reforms and changes. His actions have thus far been promising, potentially paving the way for a significant overhaul of Malaysia's political and economic system

Threats Ethnic tension will remain a non-violent, but simmering, problem, so long as there remains a threat that the influence of hardline Islam could revive. For now, however, the hardliners have lost much of their political clout

Despite a change of premier in April 2009, the ruling Barisan Nasional coalition will remain under pressure from a resurgent opposition. Failure to adequately deal with issues such as corruption, a slowing economy and the divisive affirmative action policy could yet see Anwar Ibrahim's opposition coalition force the Barisan Nasional from power



Malaysia Economic SWOT

Strengths During the past four decades, Malaysia has transformed itself from a commodities-dependent economy into a major world source for electronics and computer parts

The world's largest producer of rubber, palm oil, pepper and tropical hardwoods, and is still a net exporter of crude oil. All this provides a solid platform for economic growth

Weaknesses Malaysia's relative insulation from global energy price shocks is being eroded. It is now likely that within the next few years Malaysia will become a net importer of oil

Malaysia's economic openness can be as much of a burden as a benefit, since it confers a high degree of vulnerability to global growth and capital flows

Opportunities Opportunity for private-sector-led growth will improve as the government continues divestment of state shareholdings in order to raise funds to narrow the budget deficit

Majority Muslim population and government's ongoing efforts to boost Islamic finance could see Malaysia become a major financial hub over the medium-term horizon

Threats Wages are higher in Malaysia than in a number of its competitors, such as China and Vietnam, which could be a long-term hindrance to economic expansion. To maintain its competitive edge, Malaysia needs a steady stream of inward investment

Malaysia's dependence on migrant labour, particularly for low-skilled jobs, poses a threat to long-term economic stability

Malaysia Economic SWOT Analysis

Strengths Standards of corporate governance have greatly improved since the Asian financial crisis at the end of the 1990s - more so, in fact, than in many neighbouring countries

Foreign companies, or at least foreign manufacturing companies, looking to do business in Malaysia will continue to be welcomed with open arms - with the government offering lavish tax breaks and concessions

Weaknesses State subsidisation of prices will remain a peripheral but persistent part of daily economic life in Malaysia

Doing business in Malaysia will always, to some extent, mean dealing with the politically well-connected

Big construction projects - and big contracts for foreign construction firms - are unlikely to be as much of a priority for Malaysia's government as they were under the administration of former Prime Minister Mahathir Mohamad

Opportunities The opportunity to invest in Malaysian state assets could improve. The government, if it sticks to its word, will conduct its biggest ever divestment of state shareholdings

Malaysia is eager to compete globally in banking. It lacks a domestic champion, but with 10 main institutions in the market, bank consolidation is a strong possibility

Threats The waterways and shipping lanes that surround Malaysia will continue to experience the threat of piracy and terrorism

Malaysia is at risk of losing out to China in the race for foreign investment. Penang, once the pillar of Malaysia's electronics industry, has seen an exodus of foreign firms, with Seagate, Motorola and Solectron all shifting production elsewhere in Asia



Global Market Overview

Global Petrochemicals Overview

Table: World Ethylene Production By Country, 2009 And 2014 (‘000 tonnes capacity)

Country 2009e 2014f

US 27,387 25,500

China 12,610 20,910

Saudi Arabia 9,370 18,300

Japan 8,760 8,760

South Korea 7,380 7,580

Germany 5,745 5,745

Iran 5,606 9,006

Canada 4,951 4,951

Taiwan 4,045 4,765

Netherlands 3,980 3,980

Brazil 3,690 5,600

France 3,465 3,465

Russia 3,310 4,460

India 3,025 8,655

United Kingdom 2,885 2,885

Qatar 2,600 6,000

Thailand 2,570 4,470

Belgium 2,540 2,540

Singapore 1,990 3,790

Malaysia 1,770 1,770

Kuwait 1,700 1,700

Mexico 1,580 2,580

Spain 1,480 1,480

Argentina 800 800

Egypt 730 880

Poland 700 700

South Africa 650 650

Hungary 620 620

Indonesia 620 620

UAE 600 2,000



Table: World Ethylene Production By Country, 2009 And 2014 (‘000 tonnes capacity)

Country 2009e 2014f

Venezuela 600 1,900

Ukraine 550 550

Czech Republic 545 560

Turkey 520 520

Australia 515 515

Bulgaria 450 450

Israel 450 450

Nigeria 300 300

Azerbaijan 300 300

Central Asia 240 1,450

Slovakia 210 210

Romania 200 200

Algeria 130 1,230

Colombia 60 660

Chile 60 60

Philippines 0 320

e/f = estimate/forecast. Source: BMI

BMI estimates that total global ethylene

capacity amounted to around 132.7mn

tonnes per annum (tpa) in 2008, with

Asia Pacific representing 32.7% of

installed capacity (China contributed

29% of Asian capacity) and North

America 25.6%.

Although the Middle East and Africa are

the largest source of oil and gas, the

region contributed just 17.1% of total

capacity. This is set to change over the

medium to long term as new capacity

comes online, with global capacity set to

reach 174.8mn tpa in 2014. The region’s contribution to global capacity is forecast to rise from 11.8% in

2007 to 23.4% by 2014. This would be an increase of nearly one-third over 2009 levels, but is a

Ethylene Capacities By Region

2009 Estimate

NAFTA26%

South America

4%

China10%

Western Europe15%

Eastern Europe

5%

Middle East and Africa

17%

Asia-Pacif ic (excl. China)23%

Source: BMI



downward revision of around 7mn tpa from our previous estimates, reflecting the impact of the recession

and the financial crisis on some projects, particularly in Asia. Gulf countries are expected to account for

around 20% of the world’s ethylene production by 2010 compared to the current 8%. Some 50% of all

new ethylene projects being developed in the world are located in the region. Saudi Arabia represents

around 63% of total investment in the region, while Qatar comes second, with a 14% share. The Gulf

Petrochemicals and Chemicals Association (GPCA) has forecast that the region will account for 40% of

total global petrochemical production within 10 years, but has also warned that this would bring fresh

challenges to the region’s producers in terms of the need to secure more feedstock.

The upside of the economic slowdown is

the halt and in some cases decline in the

cost of petrochemicals plant construction,

which had accelerated rapidly from 2002

to 2008 amid a construction boom in the

Gulf region. A scarcity of raw materials,

labour and engineering expertise has

plagued the Gulf petrochemicals

industry, leading to project schedule

slippages. Some olefins complexes have

seen costs increasing by nearly four-fold

from 2002. A downturn in construction

has freed up resources and given the

petrochemical industry more negotiating

leverage over costs of planned projects. On the downside, there is a danger in over-reliance on Asian

markets, where growth is moderating as they expand their own domestic petrochemicals capacities,

contributing to the risk of global over-capacity. The greatest uncertainties come from China, which is

massively expanding capacity in 2010-2012, potentially leading to a decline in cracker operating rates to

80-85%, which is widely regarded as the break-even point for most petrochemicals producers. Gulf

producers will be hoping that capacities in Europe and North America are crowded out of the market in

order to provide further export opportunities.

China should see its share of the global total rise by 2.4 percentage points (pp), but the rest of the Asia

Pacific region will only see a 0.3pp increase. Another region set to raise its global profile is South

America, with significant new capacity set to come online in Brazil and Venezuela. Brazilian

petrochemicals giant Braskem is seeking to dominate production in the region and become a serious

player on the international petrochemicals market. The company is ramping up capacity, including a

world-scale ethylene joint venture (JV) with Pequiven in Venezuela. South America’s share of the global

total should rise from 3.9% to 5.5% due to an increase in capacity totalling 4.36mn tonnes per annum

(tpa). However, the economic downturn led to a revision of investment programmes in South America

Ethylene Capacities By Region

2014 Forecast

NAFTA19%

South America

5%

China12%

Middle East and Africa

23%

Eastern Europe

5%

Western Europe11%

Asia-Pacif ic (excl. China)25%

Source: BMI



with the JV to be delayed by two years to 2013-2014. Dow Chemical and Petrobras have also moved

back their planned petrochemical projects by one year, to 2012 and 2013, respectively.

Feedstock Issues

With Saudi Arabia and Qatar in particular ramping up capacities with a number of world-scale projects,

the feedstock will also shift. At present, naphtha represents 54% of feedstock for the world’s crackers,

with ethane providing a further 28%. BMI forecasts that by 2014 ethane will represent around 45% of

total feedstock, which is derived largely from the gas fields in the Arabian Gulf. Access to cheap

feedstock gives petrochemicals companies in the Arabian Peninsula and Iran an even greater cost

advantage over producers elsewhere in the world, particularly in Europe and North America. Higher oil

prices have led governments in the region to reinvest profits in constructing petrochemicals plants. By

2014 the Middle East and Africa will have more than twice the capacity of Western Europe. Saudi Arabia

accounts for almost half the US$250bn committed to petrochemicals projects in the Middle East,

excluding Iran. Due to this strong growth in capacity in the Gulf region, investors will be reluctant to

expand capacity in North America and Western Europe. Even de-bottlenecking expansions could be

abandoned due to concerns about feedstock costs and loss of competitiveness.

An increased use of ethane and expansion of capacity should help raise margins. Ethane costs just over a

third of the cost of naphtha and cracking margins are 6.5% higher. Naphtha prices have risen in line with

crude, which was reaching all-time highs by mid-2008. This caused ethylene contract prices to soar to

over USc70 per pound (lb) in July 2008, a 47% year-on-year (y-o-y) increase. Average oil prices of

US$60 per barrel (/bbl) or above make the Middle East the prime destination for investment, due to

access to low-cost ethane. However, the sharp decline in oil prices towards the end of 2008 and into 2009

should give naphtha-fed crackers a boost in competitiveness.

Impact Of The Global Slowdown

The global slowdown is a cause for concern for the petrochemicals industry, which is carrying out large-

scale capacity additions in 2009 and 2010, leading to a supply glut. Middle Eastern producers will be

particularly affected as they are heavily reliant on exports, particularly to Asia. Saudi Arabian projects are

already being delayed due to a lack of buyers for their products as well as the global financial crunch,

although this is expected to be a short-term phenomenon. In the long term, with Middle Eastern capacity

growth rising faster than Chinese import growth, producers are likely to reduce operating rates. In 2008,

significant parts of China’s polyolefins market were stagnating, and the situation was set to deteriorate

further over 2009, putting pressure on olefins prices. Chinese ethylene self-sufficiency could top 60% by

2010, compared to 45% in 2006. The falling price of naphtha feedstock will also undermine the

competitive advantage ethane-fed crackers in the Middle East rely on to penetrate new markets. The

downturn is not likely to last beyond 2010, as Chinese demand is likely to accelerate, with a supply gap

exceeding 15bn tpa by 2020. Meanwhile, Chinese crackers are expected to struggle to find competitively

priced sources of naphtha, bolstering the penetration of Middle Eastern producers in Asian markets.



Global olefins demand fell in 2008 due to the impact of the financial crisis from September of that year

on consumer confidence. The situation was exacerbated by de-stocking throughout all petrochemicals

product chains. Olefins demand fell by 3-4% in 2008 and growth in 2009 was largely flat. While a

recovery is forecast from 2010, substantial new capacity is due to come onstream in the Middle East,

taking advantage of low feedstock costs, and Asia. This is likely to keep crackers in the developed

economies running at around break-even or even a loss. BMI estimates that in these markets crackers

need to operate at 80-85% in order to break even. As a result, there is a distinct likelihood of ethylene

capacity closures in the US and Europe over coming years with smaller units most likely to get axed.

Table: World Petrochemicals Capacities, 2009 (‘000 tpa)

Product Capacity

Ethylene 132,020

Propylene 79,870

Butadiene 12,620

High-density polyethylene (HDPE) 26,740

Low-density polyethylene (LDPE) 21,055

Linear low-density polyethylene (LLDPE) 32,055

Polyethylene terephthalate (PET) 20,345

Polypropylene (PP) 52,320

Polyvinyl chloride (PVC) 42,240

Polystyrene (PS) 12,000

Methanol 66,350

Ammonia 145,180

Urea 133,000

Source: BMI

Cracker utilisation rates will be determined by demand for downstream producers. Around 60-65% of

ethylene is used in the production of polyethylene (PE), which is used in the production of film,

packaging, household goods, containers, bags and pipes. A further 20-25% is used in the production of

ethylene oxide (EO), most of which is used to make ethylene glycol (EG), the feedstock for polyethylene

terephthalate (PET) or polyester as well as anti-freeze. The chlorination of ethylene produces ethylene

dichloride (EDC), which is used to produce vinyl chloride monomer (VCM), the feedstock for polyvinyl

chloride (PVC), a polymer that is widely used in construction. Ethylbenzene (EB), the feedstock for

styrene monomer (SM) which produces polystyrene (PS), acylonitrile-butadiene-styrene (ABS) and

styrene butadiene rubber (SBR) is manufactured by reacting ethylene with benzene.



Global PE demand has been reasonably strong and growing ahead of GDP in most countries, including

the US. The construction of new crackers in the Middle East is being accompanied by new export-

oriented PE plants in the region, which benefit from access to competitively priced feedstock. High

growth Asian markets such as China are also set to witness a rise in capacity along the product chain,

helping them become more self-sufficient, competitive and bolstering growth in exports across the

product chain. As substantial amounts of new capacity are coming onstream in emerging markets at a

time of poor demand, PE producers in developed markets will be under pressure to reduce prices and less

competitive plants are likely to close.

Polyethylene

Performance has varied across PE products, with linear low-density polyethylene (LLDPE) steadily

eroding low density polyethylene (LDPE) market share as it allows lower gauges that can reduce costs for

many applications while retaining tensile strength. The global market for LDPE is in a state of existential

decline with the global recession simply hastening the trend , making the closure of plants in developed

markets inevitable as LLDPE plants replace them in the emerging markets. Meanwhile, HDPE has

continued to exhibit strong growth, albeit at a slower rate than LLDPE. By 2009, LLDPE accounted for

40.1% of global PE capacity, followed by HDPE (33.5%) and LDPE (26.4%). However, the PE market

was hit hard by the financial crisis and its

resulting impact on the economy.

Polymer prices have plummeted as

demand has diminished, purchasers

withdrew from the market and producers

de-stocked throughout the value chain.

Consequently, just as demand growth had

exceeded GDP growth during the good

times, the decline was sharper than the

contraction in overall demand, falling by

as much as 20% in 2009.

Polyvinyl Chloride

Up to 75% of PVC consumption is

typically used in the construction industry, which means the PVC industry is heavily influenced by

broader economic trends. The collapse in the housing market in many developed markets as well as a

rapid slowdown in construction in China and the Middle East from H208 has therefore dealt a severe

blow to PVC producers with BMI expecting the closure of smaller plants and consolidation due to a

sustained slump in the market. On top of high chlorine prices and in the face of a rapid growth in Chinese

output, BMI warns that many PVC plants will operate at below capacity in the medium term, and at a loss

due to global over-capacity.

Global PE Capacities By Product

2009 Estimate

HDPE33%

LDPE26%

LLDPE41%

Source: BMI



Polystyrene

In the PS segment, the rising price of benzene in line with rising oil prices has raised the cost of

production, while rising capacity has put pressure on PS prices. Global PS demand totaled 10.8mn tonnes

in 2008, while capacity was just under 12mn tpa, with over-capacity around 10%. The situation has

worsened as a result of the financial crisis and economic recession, despite an easing of oil prices since

mid-2008. Up to 3.4mn tpa of PS capacity could come onstream in the next five years with most capacity

due to come onstream in China. Due to rising prices, PS faces increasing competition with PP, although at

the same time it has gained market share from acrylonitrile-butadiene-styrene (ABS). The main growth

market is in building insulation. In developed markets, PS capacity has been steadily cut over the past

decade and there are few plans for new capacity over the medium-term. If oil prices fall to low levels,

naphtha cracking rates could increase, thereby increasing benzene availability pushing down costs.

Polyethylene Terephthalate

PET is manufactured through the esterification reaction between purified terephthalic acid (PTA) and

monoethylene glycol (MEG) which create a basic ester that is polymerized, extruded, cut into chips and

then processed to form the PET resin. Nearly all PTA output and around half of MEG is devoted to PET

production. As such, the performance of the PET market directly affects PTA production. More than 60%

of PET is used for the production of synthetic fibres, known commonly as polyester, with most of the rest

used for bottle production. As a fibre, PET is used in clothing, tyre manufacturing and textiles. As a light-

weight, strong and clear plastic, PET bottle resin has grown in importance. PET film is used in electronics

and packaging.

Global demand growth is being led by China, which is ramping up capacities in order to remain self-

sufficient. BMI estimated the global PET market at around 30mn tonnes in 2008 and could reach up to

40mn tonnes by 2015, by which time the Chinese market could represent two-thirds of global polyester

consumption, compared to around half in 2005. According to BMI’s projections, global PET production

capacity is set to rise from 20mn tpa in 2008 to 30.5mn tpa by 2015, mostly in China, an increase of more

than 50%. However, we also project that demand will rise by only one-third over the same period, leading

to a threat of over-capacity in a market that is already close to saturation. The growth in Asian capacity is

a particular concern, with low-cost Chinese producers likely to sell their excess production on the global

market, thereby depressing prices.

Polypropylene

BMI estimates that global PP capacity totalled 53mn tpa in 2009, with the US as the world’s largest PP

producer, with 17% of capacity, followed by China with 13%. Western European producing markets

contributed 19.4%, while the Middle East – despite its immense resources – represented just 8.2%. BMI

research indicates that the global landscape is set to radically shift over the next five years as demand and

supply to shift eastwards due to growth in developed markets.



Global demand for PP has been running on average at 7.5% over the past decade, well above global

average economic growth. BMI estimates global PP demand at 48mn tonnes in 2008, while global PP

capacity was around 52mn tpa, giving a total capacity utilisation rate of 92%. As with all petrochemicals

commodities, the level of growth in China and India has been largely responsible for the pace of PP

demand growth. However, rising PP prices mean they are catching up with PE prices, leading to a

slackening in demand growth momentum. Nevertheless, PP consumption is set to exceed 50mn tonnes in

2010 and could reach 80mn tonnes by 2016, making it the world’s largest polyolefins market. China is

now the world’s largest PP consumer, with BMI projecting that demand will reach 11.8mn tonnes in

2010, one-third more than in 2006. This is likely to lead to a deficit of over 1mn tonnes.

Most new capacity will come onstream in 2009-2012, causing a temporary decline in capacity utilisation

to no less than 85%. In 2008 alone BMI estimates the amount of added capacity at over 4mn tpa, with a

further 5mn tpa in 2009-2010. According to BMI forecasts, China will contribute 24% of the 14.3mn tpa

of PP capacity that is due to come online worldwide between 2008 and 2013. The whole of Asia will

represent just under half the additional capacity, while the Middle East will add a further 25%, largely due

to the developments in Saudi Arabia. China is to become the world’s biggest PP producing country.

Capacity expansion is occurring during a period of economic downturn, leading to excess capacity. We

expect PP producers in the Middle East and Asia to firm up their positions on the global market,

exporting their surpluses to the detriment of Western European and North American producers, which are

unlikely to bring significant new capacity online over the coming years. BMI analysis indicates that

profitability in Western Europe and North America will come under attack from cheap imports and these

regions will struggle to maintain their competitiveness on export markets. BMI forecasts a net decline in

PP capacity in these areas, with producers mothballing or closing older, smaller and less efficient plants

of capacities under 200,000tpa and focusing their attention on increasing capacity at larger sites.

Production is shifting east, following the pattern of demand. BMI expects modest declines in US capacity

over the next five years. US producers are set to devote an increasing proportion of output to the domestic

market as exports come under pressure from new capacity in the Middle East and Asia. Net US exports

are likely to fall to zero by 2012. The main challenge for the US is over-reliance on propylene derived

from fluid catalytic cracker units in refineries. As refinery capacity is unlikely to keep up with the

growing demand for propylene feedstock, PP producers are expected to be forced to look to other sources

to sustain output. BMI forecasts that US demand will reach around 9.0mn tpa in 2009, an 18% rise over

2005 levels, leaving a net surplus of around 1.5mn tpa for export.

In Western Europe BMI estimates show that the recovery in PP demand slowed considerably from 2005

to 2008 as the region’s economy slowed. Demand growth is set to be stronger in Central and Eastern

European markets over the next five years, although outside Russia no significant extra PP capacity is set

to come online. This trend could lead to the EU becoming a net PP importer over the next five years.



Producers are already closing PP plants and are focusing attention on removing bottlenecks and

expanding their other facilities.

The stagnation in production in Europe and North America and slower demand growth rates are in stark

contrast to the surging Chinese market, which we predict to be increasingly self-sufficient. China is the

world’s largest PP consumer, and BMI projects that demand will reach 11.8mn tonnes in 2010, one-third

more than in 2006. This is likely to lead to a deficit of over 1mn tonnes. However, the addition of 4mn tpa

of PP capacity in 2008-2011, with other projects in the pipeline, should help contain growth in imports.

BMI forecasts that China will represent 23.8% of the 14.3mn tpa of PP capacity due to come online

worldwide between 2008 and 2012. The whole of Asia will represent just under half the additional

capacity, while the Middle East will add a further 23.7%, largely due to developments in Saudi Arabia.

There are no plans for additional capacity in the US, giving China the opportunity to become the world’s

biggest PP producing country. Most of the contribution to capacity expansion in the Americas will be in

Brazil, with 2.38mn tpa due to be added over the next five years.

PP projects have faced delays in the Middle East. The opening of PetroRabigh’s 700,000tpa PP plant in

Saudi Arabia was moved from Q408 to Q109, while the Sharq and Yansab complexes, which have a large

amount of associated PP capacity, were also moved to 2009. Other PP plants due to come online in the

country in 2009 included a 250,000tpa expansion of Saudi Polyolefins’ plant at Al-Jubail. Also at Al-

Jubail, the Al-Waha Petrochemical JV between LyondellBasell and Sahara Olefins is due to add an

extra 460,000tpa of PP.

PP producers face significant risks. A stronger than expected slowdown in Chinese growth could lead to a

glut in supply, driving prices down and forcing less competitive operations out of business. Margins

would also be put under pressure by sustained high oil prices, which would keep the price of propylene at

high levels. A combination of over-capacity and rising costs of raw materials could lead to the reduction

of PP capacity in developed markets.

A significant constraint facing the industry is the tightening of the propylene market as production of the

monomer outstrips refinery output. Cuts in refinery throughput during the course of the global economic

downturn will make this constraint more evident. As a result, some PP producers are considering plans to

build plants dedicated to propylene production. While feedstock prices are set to rise, Chinese and Middle

Eastern producers are managing to bring down prices of end products, leading to pressures on margins,

particularly for producers in the developed world. The only way producers from the regions will be able

stay afloat is to corner niche markets with innovative products, requiring greater technical sophistication

than currently offered by plants in emerging markets. Efficiency in the manufacturing process also needs

to be improved and markets developed. At the same time, energy and transportation prices are high,

although these will ease with the decline in oil prices.



Global Oil Products Price Outlook

Tanks Still Brimming

Global product markets lost more ground in September, thanks to continuing distillate stock building and

the narrowing of the gasoline crack spread. Refiners were again obliged to trim operating levels as

margins contracted. Margins for West Texas Intermediate (WTI) crude at the US Gulf Coast halved in

September. European refinery performance improved as a result of precautionary run cuts. The Rotterdam

Brent margin widened in September by almost 50% to US$3.92 per barrel (bbl). Sadly, Singapore

refinery profitability came under increased pressure and a continuation of Asia Pacific’s margin weakness

bodes ill for downstream investment.

Casting a long shadow over the oil market is the excessive stock position, with refined product

inventories in particular forming a barrier capable of blocking further price appreciation. Early October

saw US stockpiles of distillate fuel, including heating oil and diesel, climb to their highest level since

January 1983, according to US Energy Department data. Gasoline inventories also jumped to 214.4mn

bbl as refiners boosted output. While there are indications that gasoline consumption trends have

stabilised in the US, there is no evidence of such an improvement in distillate demand.

US refiners such as Valero Energy and Sunoco have been cutting throughputs more aggressively than at

any time since the early 1980s, even though a cold winter is being predicted. Temporary plant closures

appear to be spreading, and maintenance activity either brought forward or extended. Refiners fear that

even low temperatures will not provide a sufficiently large demand boost to drain overflowing storage

tanks. The margin for producing heating oil and diesel may decline by more than one-third by January

2010, according to Energy Security Analysis.

The Energy Department predicts that heating costs in winter 2009/10 will fall 8% across the US, even as

the north east is faced with potentially frigid weather. February 2010 futures contracts in early October

showed that the premium of heating oil to crude oil will average US$5.00-5.50/bbl in January 2010, down

from the recent US$8.10/bbl. A year ago the future crack spread for heating oil was almost US$20.00/bbl.

An El Niño weather system in the Pacific Ocean may push down temperatures in the US north east in

Q110, predicted independent weather forecaster Commodity Weather Group in a late September 2009

report. Without an unusually cold US winter, distillate stocks are more than ample and could provide a

constant drain on market strength. Having said that, US heating oil futures reached a seven-week high in

early October on speculation that colder weather predicted for the rest of the month would boost demand

for home-heating fuel.

In early October the Energy Department predicted that US demand for distillate fuels could fall more than

8% in 2009, with a decline to just 3.62mn barrels per day (b/d), the biggest setback since 1980. There was



enough heating oil and diesel in the US as of early October to last more than 50 days, with stocks up by

one-quarter in the first nine months of 2009, or by almost 34mn bbl to around 172mn bbl. It will require a

drop of more than 52mn bbl, or 30%, by the end of March to bring supplies down to the five- year

average.

Gasoil stockpiles in Europe’s Amsterdam-Rotterdam-Antwerp (ARA) area are also plentiful, amounting

to almost 22mn bbl as of October 8, according to Netherlands-based consultant PJK International. The

preceding four weeks had seen a welcome 4.6% decline from the previous record level. However, diesel

and fuel oil demand remains extremely weak.

The volume of refined products in floating storage, largely distillates, off north west Europe and the

Mediterranean had grown to about 50mn bbl as of the end of September, up from the end-August level of

around 40mn bbl, the International Energy Agency (IEA) said in its October Oil Market Report (OMR).

In spite of better economic conditions, the trends towards higher fuels taxation and the overhaul of

subsidies in some developing countries mean that a sustainable recovery in demand is far from certain. In

spite of evidence that US drivers may be migrating back to less fuel-efficient vehicles, the major shifts in

patterns of consumption resulting from vehicle ownership changes are unlikely to be reversed simply

because pump prices are temporarily lower. The move in Europe away from gasoline and towards diesel

is expected to continue for a while longer, in spite of steep price differentials. However, advances in small

petrol engine technology may mean these more economical units bring to an end the love affair with

diesel.

Over the longer term, expansion of the oil refining system is still needed, particularly as market growth is

likely to accelerate as the world pulls clear of recession/depression. However, refining margins look set to

remain under pressure. Coupled with weaker upstream economics and modest profits in fuels retailing,

the downturn in refining profitability means that both international and national oil companies may re-

examine investment plans. The downstream oils market needs to see continued high level spending in

new crude distillation capacity, improved plant upgrading capability and better storage/distribution

logistics. There will inevitably be reduced capital expenditure if industry earnings and cash flow remain

under pressure. This can only result in the market tightening once again as demand picks up – with a

return to extreme price volatility and generally higher fuel prices.

Revised Forecasts

During Q309, BMI estimates that the global wholesale price for premium unleaded gasoline will have

been US$76.56/bbl. This compares with US$69.89 in the second quarter of 2009. During the three

quarters to September the price has ranged from a monthly low of US$49.33 in January 2009 to the June

2009 level of US$79.87/bbl. Gasoline prices in Q309 are down 40.2% from US$127.92 Q308.



For Q409 we now forecast an average global gasoline price of US$71.19/bbl, a decline of 7.0% from the

previous quarter, but a y-o-y decline of almost 41% from the US$120.63/bbl seen a year earlier. For the

whole of 2009, the BMI assumption for gasoline is an average US$67.46/bbl, with the price having

peaked in June. The overall y-o-y fall in 2009 gasoline prices will be 33.7%.

Table: Oil Product Price Assumptions, Q108-Q409 (US$/bbl)

Gasoline Q108 Q109 Q209 Q309e Q409f

Rotterdam Premium Unleaded 54.96 50.67 71.46 79.12 69.60

NY Harbour Unleaded 57.84 51.18 69.51 74.83 72.95

Singapore Premium Unleaded 56.32 54.80 68.70 75.72 71.01

Global average 56.37 52.22 69.89 76.56 71.19

Jet/kerosene

Rotterdam 79.66 56.45 67.52 75.98 79.51

NY Harbour 81.95 58.44 66.57 74.64 75.34

Singapore 74.73 55.45 66.54 74.08 70.93

Global average 78.78 56.78 66.87 74.90 75.26

Gasoil

Rotterdam 77.89 55.19 64.72 74.61 90.14

Mediterranean 78.40 55.85 65.22 74.79 90.75

Singapore 70.25 53.19 66.15 74.15 82.33

Global average 75.52 54.74 65.37 74.52 87.74

e/f = estimate/forecast. Source: BMI

Jet prices averaged US$74.90/bbl in Q309, using the composite for New York, Singapore and Rotterdam.

The annual decrease was 48.6%, with jet exceeding the decline in gasoil prices. The monthly low during

the previous six months was US$53.75 in February 2009, with the price reaching US$77.19/bbl in June

2009. For Q409 we assume an average global jet price of US$75.26, a quarter-on-quarter (q-o-q) rise of

0.5% and a y-o-y fall of 4.5%. For 2009 the annual level is forecast to be US$68.45/bbl. This compares

with US$124.95/bbl in 2008.

In Q309 gasoil averaged US$74.52/bbl, based on a composite global price. This is a y-o-y fall of 46.9%

over Q308, illustrating a recession-induced relative weakening of diesel versus gasoline. Our revised

Q409 forecast is for global gasoil at an average US$87.74, a q-o-q increase of 17.7%. The seasonal effect

and likely rise in year-end crude prices are set to have limited impact on gasoil prices as a result of the

unusually large inventory position. For 2009 as a whole, the BMI forecast is for an average price of



US$70.59/bbl, assuming a monthly high of US$94.09/bbl in December. The full-year outturn is a 41.8%

fall from the 2008 level.

Table: Oil Product Prices, 2007-2014 (US$/bbl)

Gasoline 2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Rotterdam Premium Unleaded 75.75 100.12 67.71 96.11 98.43 104.22 104.22 104.22

NY Harbour Unleaded 78.75 102.54 67.12 97.51 99.87 105.74 105.74 105.74

Singapore Premium Unleaded 74.98 102.64 67.56 93.81 96.08 101.73 101.73 101.73

Global average 76.49 101.77 67.46 95.81 98.12 103.90 103.90 103.90

Jet/kerosene

Rotterdam 81.13 126.61 69.87 99.16 101.56 107.53 107.53 107.53

NY Harbour 82.48 127.13 68.75 99.88 102.29 108.31 108.31 108.31

Singapore 79.17 121.11 66.75 92.69 94.93 100.51 100.51 100.51

Global average 80.93 124.95 68.45 97.24 99.59 105.45 105.45 105.45

Gasoil

Rotterdam 77.02 122.62 71.16 101.01 103.44 109.53 109.53 109.53

Mediterranean 77.69 121.75 71.65 104.10 106.62 112.89 112.89 112.89

Singapore 77.03 119.53 68.95 95.75 98.06 103.83 103.83 103.83

Global average 77.24 121.30 70.59 100.29 102.71 108.75 108.75 108.75

f = BMI forecast. Source: 2000-2006 historical data: EIA; 2007-2008 historical data: IEA

In 2008 naphtha was the weakest performer of the major refined products, gaining 31% to US$87.40/bbl

during the year. In Q309 naphtha averaged an estimated US$64.80, compared with US$110.80/bbl in

Q308 and US$54.70 in Q209. BMI puts the average naphtha price in 2009 at US$52.66/bbl, down 39.7%

from the previous year’s level.

Looking further ahead, we see gasoline prices recovering to US$95.81/bbl in 2010, rising further to

US$98.12 in 2011 and stabilising around US$103.90/bbl from 2012. The price of jet is forecast to average

US$97.24/bbl in 2010 and US$99.59 in 2011, before levelling out at US$105.45/bbl from 2012. Gasoil is

expected to rebound to US$100.29 in 2010, reaching a plateau of US$108.75/bbl from 2012.



Emerging Asia Petrochemicals Overview

China dominates the Asian petrochemicals sector, accounting for a large bulk of capacity and with plans

for further expansion under its 11th Five-Year Plan, which started in April 2006. The size of the Chinese

market and its rapid growth in demand for petrochemicals is pushing up Asian ethylene feedstock prices

and causing supply problems throughout the region. To address this, Chinese ethylene production is

scheduled to reach 10.85mn tpa by 2010, with seven major ethylene projects capable of producing 6.2mn

tpa of ethylene in progress, including an increase in the total production capacity of existing ethylene

plants by 4.38mn tpa. The largest projects involve leading petrochemicals majors, particularly Shell. The

chief risk factor for the Chinese petrochemical sector is the rapid rise in global petrochemicals

investment, which is leading to high demand for engineering contractors, particularly in the Middle East.

This could create bottlenecks in the Chinese petrochemical industry, further exacerbating the problem of

feedstock shortages throughout Asia and pushing up prices.

While Shell has concentrated its investments in China, Dow Chemical is turning its attention to India,

which has greater unrealised potential for expansion. Foreign companies have yet to take part in large-

scale Indian projects such as cracker development due to the relatively small scale of operations. The

Indian government has placed petrochemicals at the heart of its development strategy with the creation of

a number of petrochemicals zones. Nevertheless, despite strong levels of economic growth, expansion in

the Indian petrochemical industry is proceeding at a slower rate than China. Two Indian corporations

dominate around 70% of the Indian market: Reliance Industries Ltd (RIL) and Indian Petrochemical

Corporation Ltd (IPCL). Plans are in place to construct its second integrated oil refinery in the Jamnagar

Special Economic Zone, adjacent to its existing oil refinery in Gujarat. Dow Chemical is funding the

zone’s petrochemicals production. Meanwhile, the state-owned oil refiner Indian Oil Corporation Ltd

(IOCL) is expanding into the petrochemicals sector with the construction of Haldia Petrochemicals and

plans for further petrochemicals operations in West Bengal, Orissa and Haryana. Private industrial

conglomerates such as the Tata Group are also planning to enter the petrochemical sector.

The growth in demand for feedstock from China and India is proving to be a serious problem for

petrochemicals industries in smaller emerging Asian economies. For example, the Philippines aims to

move away from its petrochemical industry’s dependency on imported feedstock, but progress has been

slow and the sector has been burdened by failed projects and high levels of corporate debt, as well as

cheaper and more competitive imports. Planned developments, including a new naphtha cracker at

Batangas, expected to be operational in 2008, will see ethylene capacity of 320,000tpa and polymer

production capacity of 1.16mn tpa by 2011. However, this will not be enough to satisfy local demand, and

the Philippines will remain dependent on imports. Indonesia is also a significant net importer of basic

petrochemicals as a result of setbacks in its new facility and expansion projects since the 1997 Asian

financial crisis. Rising feedstock prices are also depressing profit margins and affecting competitiveness.

A petrochemicals national strategy developed by the local industry, the government and Japanese



investors, published in March 2007, envisages that over 50% of national ethylene demand will be met by

imports up until 2010. The Chandra Asri Petrochemical Centre (CAPC) expanded ethylene capacity to

620,000tpa and propylene capacity to 279,000tpa in 2007 to cope with demand, but Indo Olefin

Petrochemical’s 800,000tpa ethylene project is unlikely to go ahead due to a lack of financial backing.

Malaysia’s petrochemicals industry is growing and is supported by its well-developed oil and gas sector.

According to the Third Industrial Master Plan (IMP3) (2006-2020) for the petrochemicals industry, the

Malaysian government is planning to develop Bintulu (Sarawak), Gurun (Kedah), Tanjung Pelepas

(Johor) and Labuan into new petrochemical zones. The government is also planning to focus on realising

the full potential of the existing petrochemical zones. The plan would require total investment of around

MYR34bn (US$9.32bn) over the next 15 years. The petrochemicals industry is expected to remain a key

contributor to Malaysia’s manufacturing sector. Chemical Market Associates (CMA) forecasts Malaysia’s

average annual growth rate for PE and PP during 2004-2009 to be 7% and 6.5%, respectively.

While the Philippines and Indonesia are struggling in an increasingly competitive environment, Thailand

is pressing ahead with its plans to double petrochemicals capacity over the next five years. However, new

plants will have to satisfy environmental regulations which will be introduced in 2009, or the

petrochemical industry’s growth potential will be severely curtailed. The focus of investment is Map Ta

Phut, which will contain a US$1.7bn ethane cracker producing 1mn tpa of ethylene to feed PE plants at

the complex to be opened in Q409. A second cracker with a capacity of 1.7mn tpa of ethylene and

propylene is also planned. Thailand’s PTT Chemical is partnering with Dow Chemical, Siam Cement

and Toyo Engineering to develop the complex, which will make the country a significant supplier of

synthetic resins.

Elsewhere in Indo-China, Vietnam is showing little interest in developing its petrochemicals sector.

Vietnam has little capacity for domestic production of either ethylene or the basic polymers derivatives

PE and PP, and its main thrust of development is in fertiliser production for domestic use.



Table: Asian Ethylene Projects

Company Location Country Start-up Capacity (tpa)

PetroChina Lanzhou China Late 2006 360,000

PetroChina Daqing China 2007/2008 320,000

PetroChina Dushanzi China 2008 1,000,000

PetroChina Fushun China 2008 860,000

Sinopec, BASF * Nanjing China 2009 150,000

Sinopec Tianjin China 2010 1,000,000

Sinopec Zenhai China 2010 1,000,000

Sinopec Guangzhou China 2010 1,000,000

PetroChina Chengdu China 2010 800,000

Sinopec, Aramco, ExxonMobil Fujian China 2010 800,000

Sinopec, KPC Guangdong China 2010 1,000,000

Shide, SABIC † Dalian China 2010 1,000,000

Sinopec † Shanghai China na 1,000,000

Sinopec Wuhan China na 800,000

YNCC Yeochun South Korea November 2006 350,000

LG Daesan Daesan South Korea 2007 210,000

Lotte Daesan Daesan South Korea 2008 350,000

Formosa Petrochemicals Mailiao Taiwan Q107 1,200,000

CPC Kaohsiung Taiwan 2010 1,200,000

IOC Panipat India 2009 800,000

ONGC Mangalore India 2010 1,100,000

OIC Paradip India 2011 2,950,000

Haldia Petrochemicals Haldia Extra India Q108 140,000-168,000

Siam Cement Map Ta Phut India 2010 800,000

SP Chemicals Phu Yen Vietnam 2012 1,500,000

ExxonMobil * Singapore Singapore Q406 75,000

Royal Dutch Shell Singapore Singapore 2009/2010 800,000

ExxonMobil † Singapore Singapore na na

Seibu Oil Yamaguchi Japan End-2009 25,000

* Expansion, capacity refers to addition; † At planning stage; na = not available. Source: Reuters



Malaysia Market Overview

The Malaysian petrochemicals industry is growing and is aided by the nation’s well-developed oil and gas

sector. Malaysia has the world’s 25th-largest proven crude oil reserves, estimated at 4.5bn barrels, and

12th-largest proven natural gas reserves of 89trn ft3. With a production capacity of 23mn tpa, it is also the

world’s third-largest producer of LNG.

A wide range of petrochemicals are produced in Malaysia, including olefins, polyolefins, aromatics,

ethylene oxide (EO), glycols, oxo-alcohols, ethoxylates, acrylic acids, phthalic anhydride, acetic acid,

styrene monomer (SM), polystyrene (PS), ethylbenzene, vinyl chloride monomer (VCM) and polyvinyl

chloride (PVC). World-scale producers of low-density polyethylene (LDPE), linear low-density

polyethylene (LLDPE), high-density polyethylene (HDPE), PP, expanded polystyrene (EPS), PVC, ABS

and polyethylene terephthalate (PET) resins have established plants in Malaysia, providing a steady

supply of feedstock material for the plastic industry. Natural gas and naphtha are the two locally available

basic raw materials for the petrochemical industry.

Around 39 companies are in operation in the nation’s petrochemicals industry, with total investments of

about MYR28bn (US$7.36bn). Approximately 47% of the investment is attributed to domestic sources

and 53% to foreign investment. The US is the leading investor, accounting for 40% of the total foreign

investments in the industry. Other nations investing in Malaysia’s petrochemicals sector include Japan,

the UK, Germany and Taiwan.

The following factors have contributed to petrochemical industry growth in Malaysia:

Increase in realised product prices and sales volumes;

Long-term reliability and security of gas supply;

Well-developed infrastructure;

Cost competitiveness in the market;

Malaysia’s strategic location within the ASEAN and its proximity to the major Far East markets.

State-owned oil and gas company Petronas and the privately owned Titan Chemicals dominate the

Malaysian petrochemicals industry. Titan operates two of the nation’s four ethylene plants and has a

production capacity of 630,000tpa, while Petronas operates the remaining two in conjunction with BP,

Japan-based Idemitsu and Dow Chemical, with a combined capacity of 1mn tpa. Petronas also operates a



range of downstream joint venture (JV) facilities at its Kerteh and Gebeng complexes, along with global

industry players. Titan is the second-largest polyolefins producer in South East Asia. The company has

plans to raise the capacity of its polypropylene (PP) plants by an additional 130,000tpa by 2007. The

company currently operates eight plants on two integrated sites in Pasir Gudang and Tanjung Langsat,

Johore.

The presence of multinational petrochemicals players, including BASF, BP, Dow Chemical, Royal Dutch

Shell, ExxonMobil, Eastman Chemical, Idemitsu, Mitsui, Toray Industries, Kaneka, the US-based

Polyplastic, Dairen Chemicals, Thirumalai and US-based Westlake Chemical, reflects the nation’s

potential as an investment location for petrochemicals industries. A point to note is that most of these

firms work in collaboration with Petronas.

In 2008, Malaysia had 2.89mn tpa of olefins production capacity, of which 1.77mn tpa was ethylene and

1.12mn tpa was propylene. Polymer production capacities include 975,000tpa of PE, 560,000tpa of PP,

215,000tpa of PET and 260,000tpa of PVC. Aromatics production capacities include 330,000tpa of

benzene, 100,000tpa of butadiene, 220,000tpa of ethylbenzene, 70,000tpa of toluene and 550,000tpa of

paraxylene. Derivative and intermediates include 1.77mn tpa of methanol and 600,000tpa of terephthalic

acid.

Table: Malaysia’s Olefins Facilities, 2008

Product Company Location Capacity, tpa

Ethylene Ethylene Malaysia (EMSB) Kerteh 425,000

Ethylene Optimal Olefins (Malaysia) Kerteh 600,000

Ethylene Titan Petchem Pasir Gudang 300,000

Ethylene Titan Petchem Pasir Gudang 440,000

Propylene MTBE Malaysia Gebeng, Kuantan 80,000

Propylene MTBE Malaysia Gebeng, Kuantan 300,000

Propylene Optimal Olefins Kerteh 95,000

Propylene Shell Refining Company Port Dickson 140,000

Propylene Titan Petchem Pasir Gudang 130,000



Source: BMI



Table: Malaysia’s Aromatics Facilities, 2008


Benzene Aromatics Malaysia Sdn Bhd Kerteh 200,000

Benzene Titan Petchem Pasir Gudang 130,000

Butadiene Titan Petchem Pasir Gudang 100,000

Ethylbenzene Idemitsu SM (Malaysia) Pasir Gudang 220,000

Methanol Petronas Fertilizer (Kedah) Gurun 70,000

Methanol Petronas Methanol Labuan Labuan Island 1,700,000

Terephthalic acid BP Malaysia Gebeng, Kuantan 600,000

Toluene Titan Petchem Pasir Gudang 70,000

Paraxylene Aromatics Malaysia Sdn Bhd Kerteh 550,000

Source: BMI

Table: Malaysia’s Polyolefins Facilities, 2008


HDPE Titan Petchem Pasir Gudang 120,000

LDPE Petlin Kerteh 255,000

LDPE Titan Petchem Pasir Gudang 220,000

LLDPE Polyethylene Malaysia Kerteh 150,000

LLDPE Titan Petchem Pasir Gudang 230,000

PP Polypropylene Malaysia Gebeng, Kuantan 80,000

PP Titan Petchem Pasir Gudang 200,000

PP Titan Petchem Pasir Gudang 280,000

PET MPI Polyester Industries Shah Alam 35,000

PET Penfibre Prai 30,000

PET Recron Malaysia Nilai 150,000

PVC Industrial Resins (Malaysia) Johor Baharu 30,000

PVC Kaneka Paste Polymer Gebeng, Kuantan 30,000

PVC Malayan Electro-Chemical Industry Company Prai 50,000

PVC Vinyl Chloride (Malaysia) Kerteh 150,000

Source: BMI r



Key Petrochemical Products

From being an importer of petrochemicals, Malaysia is now a net exporter of major petrochemicals, and

is also pursuing various FTAs, which are expected to benefit the industry. The Japan-Malaysia Economic

Co-operation Partnership (JMEPA) was inked in December 2005 by Malaysia and Japan, and is expected

to strengthen economic and industrial co-operation in addition to creating favourable conditions for

bilateral trade and investment. Two rounds of negotiations on the Malaysia-US FTA took place in Penang

in June and July 2006, and the third round of negotiations took place in October 2006.

Malaysia is likely to eliminate import duties on rubber and plastics over the next six to eight years, and to

reduce import duties on chemicals and petrochemicals over the next 10 years. Japan is expected to

maintain its duty-free treatment on 6,613 industrial and forestry products. The agreement is likely to come

into force after the completion of domestic formalities by both the nations.

Plastics

Malaysia’s plastic consumption is the highest among developing nations such as Thailand, China and

Vietnam. About half of its products, including bags, housewares and other packaging materials, are

exported to the US, the EU, Australia and Japan.

Malaysia’s major plastic consuming industries include packaging (34%), electrical and electronics –

mainly parts and components for TV, air-conditioners and telecommunication equipment (28%);

household products (15%); construction (8%); automotive (7%), and other miscellaneous industries (8%).

The plastics industry is expected to benefit from the trade liberalisation reforms to be initiated by the

WTO against the backdrop of a stronger euro. Further, FTAs are also expected with nations such as

China, India and New Zealand.

Regulatory Structure

The Petroleum Development Act 1974 regulates the petroleum and petrochemicals industries in Malaysia.

Petronas is authorised to regulate all activities in the upstream petroleum sector, while the Ministry of

Domestic Trade and Consumer Affairs and the Ministry of International Trade and Industry (MITI) are

empowered to regulate all activities in the downstream sector of the petroleum industry. Licenses for the

marketing and the distribution of petroleum and petrochemicals products are granted by the Ministry of

Domestic Trade and Consumer Affairs. MITI is authorised to issue licenses for the processing and

refining of petroleum and the manufacture of petrochemicals products.

A number of incentives are offered to investors in the Malaysian industrial sector. Both local as well as

foreign-owned companies are taxed at a common rate of 28%. Manufacturing companies enjoy income



tax exemption of 20% or 100% on the statutory income for five years. The companies also get an

investment tax allowance of 60% or 100% on the qualifying capital investment for a period of five years,

which can be used to offset 70% or 100% of the statutory income. High technology companies in

particular enjoy pioneer status with a tax exemption of 100% on the statutory income for five years or

Investment Tax Allowance of 60% on the qualifying capital expenditure for five years, which can be

offset against 100% of the statutory income. In addition to this, pre-packaged incentives are also on offer.

The Malaysian government also provides incentives for research and development.



Industry Trends And Developments

External investments in the Malaysian petrochemicals sector are increasing, particularly from Japanese

firms. Malaysia is reinforcing its role as a major LNG producer and supplier; domestic petrochemicals

firms are increasing operations and ramping up investment and methanol production in neighbouring

countries.

Upstream

Malaysia has 5.46bn bbl of proven oil reserves (according to the June 2009 BP Statistical Review of

World Energy) but, with relatively stable production and limited exploration activity, this total can be

expected to shrink gradually over the next five years, dropping to an estimated 4.99bn bbl by 2014. The

December 2008 survey by Oil and Gas Journal suggests 4bn bbl of proved reserves for the

country. Talisman, Shell and Murphy Oil have all made significant oil discoveries that could ultimately

stem the decline in reserves. The 2,387bcm of gas reserves (BP Statistical Review of World Energy)

should be stable over the near term, as new prospects are developed for export, but are forecast to slide

towards 2,205bcm by 2014.

With relatively healthy GDP growth forecasts beyond the challenges of 2009, we expect to see a

continuation of the respectable energy demand growth trend, which has seen oil consumption rise from

407,000b/d in 1998 to 475,000b/d in 2008. Oil consumption will probably not keep pace with underlying

economic expansion, because the country has been replacing oil-fired power stations with coal-fuelled

plants, which undermines the oil demand trend.

In addition, the government has been reducing fuel subsidies, which could also have a negative impact on

consumption. Fuel pricing remains under state control. Our forecasts suggest a potential demand for

557,000b/d of crude by 2014.

Production of crude averaging 754,000b/d in 2008 looks set to ease over the short term, before recovering

somewhat at the end of the forecast period, which implies net crude exports shrinking to just 193,000b/d

by 2014. Mature fields are in decline, but ExxonMobil, Shell and Hess have new projects that should

partly offset the falling output. Talisman and Murphy Oil also have discoveries that could be used to slow

the medium- to long-term decline in oil output. New oil production projects include the Kikeh block, the

country’s first deepwater oil and gas discovery. The Shell-operated Gumusut/Kakap deepwater fields are

scheduled to begin production in 2010, possibly reaching 150,000b/d by 2011. Shell also expects to begin

oil production at the deepwater Malikai field by 2012, although no production timetable has been

disclosed.



Petronas in June 2009 announced that its subsidiary Petronas Carigali and ExxonMobil had finalised a

PSC for the development of seven mature offshore oil fields. The partners plan to invest US$2.1bn in

further development of the fields, which are currently being developed under a PSC signed in 1995 and

due to expire in 2012. The new PSC will be for a 25-year period and includes provisions for enhanced oil

recovery (EOR), the rejuvenation of existing facilities and further drilling at the fields. The fields include

Seligi, Guntong, Tapis, Semangkok, Irong Barat, Tabu and Palas.

An increase in exploration activity during the past couple of years has resulted in some longer-term

production potential, which could further delay the point at which Malaysia becomes a net importer of

crude oil.

One of the most active areas for gas exploration is the Malaysia-Thailand Joint Development Area (JDA),

located in the lower part of the Gulf of Thailand. Three blocks, Block A-18, Block B-17 and Block C-19,

are administered by the Malaysia-Thailand Joint Authority (MTJA), with each country owning 50% of

the JDA’s resources -- estimated at up to 270bcm of proven and probable gas. The Carigali-PTTEP

Operating Company was scheduled to start up production at Block B-17 in the third quarter of 2009.

Initial output is expected to be 2.8bcm, rising potentially to 4.9bcm per annum if additional reserves are

located.

Murphy Oil has announced the start of production at the gas fields in blocks SK 309 and SK 311 offshore

Sarawak. Production started in September 2009, with the contract terms specifying the supply of 7.08mn

cubic metres of gas per day for a period of five years. This is equivalent to 2.6bcm per annum and the gas

produced will be supplied to the Petronas LNG complex in Bintulu.

Gas supply from the JDA with Thailand, plus projects such as ExxonMobil’s Bintang field, should mean

continuing growth in gas volumes and exports. Our forecasts assume gas production of 70bcm in 2010,

with consumption of 30bcm. Estimated exports of 36bcm in 2009 are forecast to reach 56bcm by 2014, as

production rises to an estimated 90bcm.

Liquefied Natural Gas

The country operates major LNG facilities and provides some 13% of world LNG exports, making it the

world’s second largest exporter in 2008 after Qatar. The expansion of the Bintulu LNG complex in

Sarawak has been completed and it is now the world’s biggest LNG centre with an aggregated production

capacity of 23mn tonnes per annum (tpa). Capacity should rise further over the medium term. Most of the

production from the most recent expansion is being sold under long-term contracts with Tokyo

Electric, Tokyo Gas and Chubu Electric.

Australia’s Santos announced in June 2009 that it had signed a deal to supply Petronas with 2mn tpa, or

2.76bcm, of LNG. The supply agreement will run for 20 years starting in 2014 and makes use of the



Santos-operated Gladstone LNG (GLNG) project that will be fed by coal bed methane (CBM). Petronas

is a partner to Santos in the Gladstone LNG project, with a 40% stake.

In July 2005, Petronas announced it had signed a deal with Korea Gas (Kogas) to supply it with close to

2mn tpa of LNG for 20 years from 2008, with the possibility of the contract extending by five years. The

deal sees 6.7mn tonnes, or about a third of Malaysia’s total LNG capacity, consumed by Kogas. The other

big buyer of Malaysian gas is Japan. According to Petronas officials, Malaysia has sold nearly all of its

23mn tpa capacity of LNG for the next 20 years.

Petronas signed a sale and purchase agreement (SPA) in March 2007 with Japan’s Saibu Gas to supply

up to 390,000tpa of LNG from October 2013. The deal is an extension of an existing contract. Saibu Gas,

which supplies to about 1.1mn users in Japan’s Fukuoka region, now receives about 357,000tpa from

Malaysia. In a statement, Petronas said the LNG would be supplied from its MLNG plant in Bintulu,

Sarawak and would be transported to Saibu Gas’ receiving terminals in Nagasaki and Hakata on an ex-

ship basis.

Petronas agreed another LNG supply deal with Japan in December 2007. It signed an SPA with Osaka

Gas to provide up to 920,000tpa (1.27bcm) for 15 years with the possibility of a five-year extension.

Beginning in April 2009, the LNG will be shipped from the MLNG facility in Bintulu to Osaka Gas’s

import terminals at Senboku in northern Japan and Himeji in the south. While Osaka Gas has dealt with

Malaysian LNG companies before as part of a consortium to buy LNG, this latest agreement marks the

first time the major gas player has negotiated an independent deal.

Recent Developments

In July 2009, Dow Chemical said it would sell its stake in the Optimal Group of companies, a

petrochemical producer in Malaysia, to Petronas, Dow’s joint venture partner in the venture for

US$660mn. Dow and Petronas entered into a commercial agreement to continue serving their customers

with products manufactured by Optimal, with Dow marketing Optimal’s basic and performance chemical

products to existing customers in the Asia Pacific region. The move gave Petronas 88% ownership of

Optimal Olefins (12% owned by Sasol) and full control of Optimal Glycols and Optimal Chemicals.

Optimal’s plants are all at Kerteh, Malaysia. The group’s range of products includes ethylene and

propylene, ethylene oxide, ethylene glycol, butanol, ethylene oxide derivatives, and other basic and

specialty chemicals.

Malaysia has six oil refineries, providing combined capacity of around 625,000b/d. Three are operated by

Petronas (Melaka I and II and Kertih), two by Shell’s Malaysian units and one by ExxonMobil. Petronas

is carrying out an upgrade project at the Melaka refinery to increase capacity by around 40,000b/d (from

130,000-170,000b/d), with completion scheduled for 2010.



A Qatar-backed oil and gas investment group known as Gulf Petroleum agreed in February 2008 to

build a MYR15bn (US$4.7bn) oil refinery and petrochemicals complex in Manjong, in the northern state

of Perak, according to reports in the New Straits Times. The Perak regional government and Gulf

Petroleum (Malaysia) apparently signed a Memorandum of Understanding (MoU) in the region’s capital,

Ipoh. A 4sq km site will eventually house a crude processing plant, a petrochemicals facility and product

storage capacity, which will be developed in three phases over a three-year period. In January 2009, Gulf

Petroleum said that the project would continue despite the global economic crisis and in March 2009, it

was reported that the project was scheduled for completion in 2011.

Capacity for the new plant is likely to be 100,000-150,000b/d of crude. There are no details yet regarding

petrochemicals capacity or the scale of the storage complex. Gulf Petroleum is keen to develop the site as

a major refining and petrochemicals site for the Asia Pacific region. Other investors in the complex will

apparently include Saudi Arabian, Bahraini, UAE, Omani and Kuwaiti interests. Gulf Petroleum is a

growing integrated oil and gas group with activities and interests spanning the Middle East, North Africa

and Europe. Among its major shareholders is the Qatari royal family.

In July 2009, special purpose vehicle Merapoh Resources announced that it had secured investment to

build a US$10bn refinery in Sungai Limau, Yan, in the state of Kedah. Two Hong Kong-based private

equity firms have each agreed to put up US$5bn of funding and will in turn each receive 40% stakes in

the project, with Merapoh to take the remaining 20%. The planned plant would process imported crude

oil into refined products for export mainly to East Asia. The proposed facility would have capacity of

350,000b/d and is slated for completion in 2013-2014. Engineering, construction and maintenance

contracts have been awarded to South Korea’s SK Engineering & Construction. According to Merapoh,

other strategic partners for the project are CNPC, which would buy 200,000b/d of the refinery’s output

under a 20-year deal, and Saudi Aramco, which would be the main supplier of feedstock. CNPC and

Merapoh signed a MoU on the project in 2007, which was followed by a 20-year marketing agreement

signed in July 2009. According to Merapoh’s director Nazri Ramli, under the deal CNPC has agreed to

purchase oil products from the Yan refinery for 20 years. Crude feedstock for the refinery is to be

supplied by Saudi Aramco.

It looks as though the Yan refinery could form part of the Trans-Peninsular Pipeline project (TransPen),

which was proposed in 2007 as a way to transfer oil from the Middle East to East Asia while bypassing

the congested and pirate-ridden Straits of Malacca. The project called for the construction of a 312km oil

pipeline connecting Yan in Kedah with Bachok in Kelantan and included a refinery in Yan and three

storage tanks in Bachok.

According to reports in the Malaysian media quoted by Asia Port Daily News (APDN) in August 2009,

CNPC could begin construction of the TransPen project in the near future. The project would cost an

estimated US$7bn and involve the construction of a 300km oil products pipeline through northern



Malaysia. The pipeline would transport refined products from the Yan refinery to the city of Bachok on

the east coast. Bypassing the busy Malacca Strait, TransPen would cut three days off the oil transit time

between the Middle East and China. According to APDN, TransPen is to be completed in two phases over

a seven-year period from the start of construction. The first phase would be capable of transporting 2mn

b/d of oil, roughly 17% of the current daily volumes passing through the Malacca Strait. The pipeline’s

capacity would then be expanded by an unspecified amount during the second phase. Merapoh and CNPC

are also holding discussions with Bangkok over a potential pipeline link between Thailand and the

TransPen project, although precise details are unclear.

Another refining project is being studied by British investment company Lenstar Investments, according

to a July 2009 report in local newspaper The Edge Financial Daily. The project would involve an

US$8bn refining and petrochemical complex, with feasibility studies due to look at Melaka and Perak as

possible locations.

Iran’s state oil company has been invited to take a stake in a new Malaysian refinery. In March 2007,

Malaysian firm SKS Development offered National Iranian Oil Company (NIOC) a minority stake in

the US$2.2bn project, a government source and an official said. The planned 200,000b/d refinery would

process Iranian crude.

Emergence Of Petrochemicals Zones

The Malaysian government has set up a Third Industrial Master Plan for the petrochemicals industry. The

plan will focus on developing Bintulu (Sarawak), Gurun (Kedah), Tanjung Pelepas (Johor) and Labuan

into new petrochemicals zones. The government plans to encourage the private sector to invest in support

facilities, infrastructure and supply services, which are important for the development of petrochemicals

zones. The investments are to be undertaken through a consortium of JVs. This would enable the setting

and sharing of the costs in building and maintaining the facilities at competitive levels. Development of

upstream and downstream linkages is also a part of the plan. Efforts would also be made to realise the full

potential of the existing petrochemicals zones, Kertih (Teregganu), Gebeng (Pahang) and Pasir Gudang-

Tanjung Langsat (Johor), through a systematic and coordinated approach.

Over the last decade, Malaysia has established a near ideal infrastructure to support a vibrant

petrochemicals industry and investors benefit from the facilities that are already in place. Integrated

petrochemicals zones offer centralised utilities, efficient storage services and a comprehensive

transportation network that helps reduce capital and operational costs. The development of these zones

with clusters of petrochemicals plants has resulted in a value chain that ensures the progressive

development of downstream petrochemical activities. There are about 29 petrochemicals plants in the

petrochemicals zones mentioned here:



Kerteh, Terengganu – The main petrochemicals complex in the Kerteh zone is the Petronas

Petrochemicals Integrated Complex (PPIC) that links the entire range of oil and gas value chain,

beginning from upstream exploration and production, to the final phase of petrochemical

manufacturing;

Gebeng, Pahang – The Gebeng Petrochemicals Zone is a petrochemicals hub for multinational

players, including BASF, the US-based Amoco Chemicals, Kaneka, Eastman and Polyplastics. The

zone offers an integrated environment that favours petrochemical units operating there;

Pasir Gudang/Tanjung Langsat, Johore – Pasir Gudang is an established industrial zone. To provide

infrastructural support to the growing petrochemicals industry, the adjacent Tanjung Langsat site has

also been developed to enhance manufacturing capacity.

Table: Malaysia Petrochemical Plants

Name of Plant Products and Capacity Location

Petronas Aromatics Paraxylene, benzene – 545,000tpa Kertih

Petronas Ammonia Ammonia – 400,000tpa Kertih

BP Petronas Acetyls Acetic acid – 500,000tpa Kertih

Ethylene (Malaysia) Ethylene – 320,000tpa Kertih

Polyethylene (Malaysia) PE – 200,000tpa Kertih

Optimal Olefins (Malaysia) Ethylene and propylene – 765,000tpa Kertih

Optimal Chemical (Malaysia) Ethanolamines, ethoxylates, glycol ethers, butanol, butyl

acetate – 548,000tpa Kertih

Optimal Glycol (Malaysia) EO, EG – 875,000tpa Kertih

Petlin LDPE – 250,000tpa Kertih

Vinyl Chloride (Malaysia) VCM and PVC – 400,000tpa Kertih

BASF Petronas Chemical (Malaysia)

Acrylic acid and esters, syngas, butyl acrylate, oxo-alcohols, phthalic anhydride and plasticizers, butanediol,

etrahydrofurane, gamma-butyrolactone – 550,000tpa Gebeng

Eastman Chemicals (Malaysia) Polyester copolymers – 30,000tpa Gebeng

Amoco Chemicals (Malaysia) PTA Gebeng

Kaneka Paste Polymers Dispersion PVC Gebeng

Kaneka Malaysia Methyl methacrylates copolymers Gebeng

MTBE (Malaysia) MTBE, propylene – 380,000tpa Gebeng

Polyplastics Asia Pacific Polyacetals Gebeng

Polypropylene (Malaysia) PP Gebeng

Titan Petrochemicals (Malaysia) Ethylene, propylene, BTX – 1194,000tpa Pasir Gudang



Table: Malaysia Petrochemical Plants

Name of Plant Products and Capacity Location

Titan Polyethylene (Malaysia) PE – 530,000tpa Pasir Gudang

Titan PP Polymer (Malaysia) PP – 370,000tpa Pasir Gudang

Petrochemicals (Malaysia) PS Pasir Gudang

Idemitsu SM (Malaysia) Ethylbenzene, SM – 330,000tpa Pasir Gudang

BASF (Malaysia) Expandable polystyrene – 30,000tpa Pasir Gudang

Dairen Chemical (Malaysia) Ethylene vinyl acetate – 30,000tpa Pasir Gudang

ASEAN Bintulu Fertilizer (Malaysia) Ammonia, urea – 1100,000tpa Bintulu

Malaysia LNG LNG – 22.8mn tpa Bintulu

Malaysia LNG Dua LNG Bintulu

Malaysia LNG Tiga LNG Bintulu

Shell MDS (Malaysia) Middle distillates Bintulu

Source: MIDA, BMI



Business Environment

Asia Petrochemicals Business Environment Ratings

The Malaysian petrochemicals sector has been growing at an impressive pace. The government’s

investor-friendly policies and easy availability of feedstock have been chiefly responsible for this growth.

The country is also strategically located and boasts strong physical infrastructure. About 39 companies

are in operation in the nation’s petrochemicals industry. Major players in the industry include state-owned

Petronas and local Titan Chemicals, Germany-based BASF, UK-based BP, Netherlands-based Royal

Dutch Shell, Japan-based Mitsui, Toray Industries and Kaneka, as well as US-based ExxonMobil, Dow

Chemical and Eastman Chemical and China-based Dairen Chemicals.

Malaysia ranks seventh place in BMI’s Petrochemicals Business Environment Rankings for Asia with

63.4 points. While it has a significant petrochemicals production base, it lags in terms of infrastructure.

Nevertheless, oil and gas reserves should sustain some expansion of the country’s petrochemicals sector

over the next decade.

Table: Asia Pacific Petrochemicals Business Environment Ratings

Limits of potential returns Risks to realisation of returns

Country Petrochemicals

market Country

structure Limits Market

risks Country

risk Risks Petrochemicals rating Rank

Japan 76.7 90.1 81.4 80.0 76.6 80.2 80.2 1

South Korea 80.0 76.6 78.8 65.0 77.0 73.4 77.5 2

Singapore 60.0 90.8 70.8 90.0 82.9 85.0 75.0 3

China 86.7 65.6 79.3 55.0 66.3 62.9 74.4 4

Taiwan 70.0 76.6 72.3 65.0 73.3 70.8 71.9 5

Malaysia 53.3 68.8 56.6 80.0 72.0 74.4 63.4 6=

Thailand 66.7 59.6 58.7 80.0 72.0 74.4 63.4 6=

Australia 40.0 90.7 57.7 75.0 70.0 71.5 61.9 8

India 73.3 38.1 61.0 70.0 55.6 59.9 60.7 9

Indonesia 46.7 39.8 44.3 50.0 46.7 47.7 45.3 10

Philippines 30.0 51.2 37.4 75.0 51.5 58.5 43.7 11

Vietnam 10.0 44.5 22.1 60.0 48.6 52.0 31.1 12

Scores out of 100, with 100 highest. Source: BMI



Limits Of Potential Returns

Petrochemicals Market

Malaysia is home to an expanding petrochemicals industry. A well-developed oil and gas sector,

availability of tax incentives and sound physical infrastructure make the Malaysian petrochemicals

industry a lucrative investment destination. The country accounts for the world’s 25th-largest proven

crude oil reserves, estimated at 4.5bn barrels, and 12th-largest proven natural gas reserves of 89trn ft3.

About 39 firms operate in the nation’s petrochemicals industry. The new Third Industry Master Plan

envisages development investment to the tune of MYR34bn (US$9.99bn). Plans for the construction of

three new crackers by 2020 have also been outlined. The country also boasts well-developed

petrochemicals zones. Malaysia scores 53.3 points in this category, up 3.3 points from 2009 due to a

small upward revision in polymer capacities to 2.09mn tpa.

Country Structure

Malaysia is ahead of its regional peers in terms of physical infrastructure. Malaysia is home to well-

developed, integrated petrochemicals zones that offer world-class facilities. The Malaysian government is

working towards developing Bintulu (Sarawak), Gurun (Kedah), Tanjung Pelepas (Johor) and Labuan

into new petrochemicals zones. Existing petrochemicals zones including Kertih (Terengganu), Gebeng

(Pahang) and Pasir Gudang-Tanjung Langsat (Johor) will also be leveraged further. The country also

possesses a well-developed financial infrastructure and a world-class power infrastructure. Malaysia

scores 68.8 points in this category.

Risks To Realisation Of Returns

Market RiskS

Malaysia is one of the most investor-friendly economies of South East Asia. The country offers a number

of tax sops and other incentives for investors in the manufacturing industry. Incentives are also provided

for research and development related projects. The government also promotes foreign investment.

However, the thrust of investment is concentrated in refining rather than downstream industries. In the

past, Malaysian refining capacity has not always been adequate to meet domestic demand, meaning the

country has had to rely on refined products imports from Singapore to meet the shortfall. Having invested

strongly in expanding and upgrading capacity in recent years, however, Malaysia can now meet domestic

requirements and plans to take advantage of its strategic geographical location to establish itself as a

regional refining and distribution hub along the lines of Singapore, which refines around 1.26mn b/d of

crude that passes through the Straits of Malacca for exports to other Asian markets. The government has

therefore introduced generous tax incentives to encourage investment in the refining industry and several

new plants are being developed and proposed. Malaysia scores 80 points in this category.

Country Risk

Corruption levels in the country are low by regional standards, and the law is reasonably well-defined.



The country’s policies are known to be relatively stable and predictable. Fortunes of the Malaysian

economy are closely related to those of its export markets, but overall long-term external risk is not very

high. The country’s long-term financial position also appears highly stable. Malaysia scores 72 points in

this category, up 3.2 points since 2009 due to an improvement in long-term financial and external risk

ratings amid a global economic recovery.

Malaysia’s Business Environment Outlook

Standards of corporate governance have improved greatly in Malaysia in recent years, more so in fact

than in many neighbouring countries, and foreign companies - in particular manufacturing companies -

will continue to be welcomed, with the government offering numerous incentives to attract foreign direct

investment (FDI). However, Malaysia’s affirmative action policy, which aims to redistribute wealth in

favour of ethnic Malays, serves as a serious barrier to foreign firms in a number of key areas, most

notably in the awarding of lucrative government contracts. Additionally, doing business in Malaysia will

always, to some extent, mean dealing with the politically well-connected as, despite substantial

government efforts to crack down on bribery, corruption remains a key concern.

Latest/Recent Developments

State-controlled oil and gas company Petronas on September 30 announced that it has acquired a 20%

stake in each of two deepwater oil and gas blocks owned by US-based Exxon Mobil in eastern

Indonesia. Petronas has purchased stakes in the Mandar block in the Makassar Strait and in the

Surumana block off North Makassar. However, the company did not disclose financial details of the

deal, as it is still calculating the investments that have been made in the two blocks. It was earlier

reported that Exxon needed an investment of as much as US$70mn for exploration activities in the

two blocks.

Mobile operator Maxis Communications is planning an initial public offering (IPO). Prime Minister

Datuk Seri Najib Tun Razak put in a request in July 2009 to the operator'’ majority owner, billionaire

Ananda Krishnan, to re-list the company on the Bursa Malaysia in order to help increase the market’s

liquidity and attract investors. Krishnan took the company private in 2007, and has a 75% stake. The

remaining 25% stake is held by Saudi Telecom. Maxis Communications’ 2007 privatisation made

close to US$5bn. With a 42.1% share of the local mobile market at the end of March 2009, Maxis

Communications is ahead of rivals Celcom (32.5%) and DiGi (25.4%).

Malaysia’s government-owned public transport operator, Syarikat Prasarana Negara Berhad (SPNB),

has announced that it expects to begin extension work on two of its light rail transit (LRT) lines in

2010. The work involves the extension of the Kelana Jaya line and the Ampang line by 17km and

17.7km, respectively. Details of the awarding of projects have yet to be disclosed, but potential key

beneficiaries include large construction companies such as IJM Corp Berhad, UEM Builders



Berhad and WCT Berhad. The extension work, with an estimated cost of MYR7bn (US$2bn), is

expected to take three years to complete.

German automaker Volkswagen (VW) on September 8 revealed that it is looking at making Malaysia

its sourcing hub for auto parts to meet its global production targets. Volkswagen Group Malaysia

Managing Director Andreas Prinz has stated that with the global sourcing hub, the automaker will

look to fulfil the 40% local content requirement for vehicle production in Malaysia, along with

supplying its worldwide production units. A plan such as VW’s shows faith in Malaysia’s suppliers

and echoes the optimism that has prompted BMI to raise its vehicle sales growth forecast for the

country from a projected decline of 13% to a drop of 9.5%.

Expansion work to dredge the south channel at Port Klang was likely to be completed in December

2009. Initially, the plan was to dredge the channel to 17.5m deep, but financial constraints - the

government only allocated US$28.41mn to the project - meant this had to be changed to around

16.0m. Observers believe the expansion project will enable the port to cater for huge super post

panamax container vessels with drafts of more than 15m. BMI notes that Malaysia is situated on the

Malacca Strait; well positioned to capture cargo volumes from Europe-Asia and US-Asia trade routes.

Table: BMI's Asia Pacific Business And Operational Risk Ratings

Infrastructure Institutions Market orientation Overall

Afghanistan 20.73 29.85 40.59 30.39

Bangladesh 35.05 25.89 47.74 36.23

Bhutan 20.29 58.26 35.63 38.06

Cambodia 19.69 26.83 63.69 36.74

China 68.01 42.73 46.75 52.50

East Timor 32.47 30.62 59.50 40.86

Hong Kong 75.06 80.76 90.72 82.18

India 50.37 40.21 28.77 39.79

Indonesia 32.65 22.48 65.53 40.22

Japan 88.03 81.02 48.74 72.59

Laos 23.90 31.49 50.17 35.18

Malaysia 65.71 59.42 59.29 61.47

Maldives 40.42 54.31 67.17 53.97

Myanmar 21.44 3.06 23.43 15.98

Nepal 42.67 36.69 54.09 44.49

North Korea 23.63 8.98 1.97 11.53

Pakistan 36.08 29.57 47.50 37.72



Philippines 40.12 37.12 57.64 44.96

Singapore 83.09 88.18 80.16 83.81

South Korea 82.92 67.88 69.35 73.39

Sri Lanka 35.57 48.85 37.49 40.64

Taiwan 69.49 61.38 64.61 65.16

Thailand 59.54 60.06 59.00 59.53

Vietnam 37.23 39.11 49.71 42.01

Australia 86.43 81.44 47.57 71.81

New Zealand 83.41 90.25 63.21 78.96

Global average 47.39 47.46 48.65 47.73

Region average 49.00 47.56 52.31 49.62

Scores out of 100, with 100 representing the best score available for each indicator. Source: BMI

Legal Framework

Malaysian law is founded on English common law. It has a single-structured court system consisting of

superior courts and subordinate courts. The subordinate courts are the Magistrate Courts and the Sessions

Courts. The superior comprises the two High Courts - one for Peninsular Malaysia and the other for the

States of Sabah and Sarawak - the Court of Appeal and the Federal Court. The Federal Court, which has

ultimate jurisdiction in constitutional matters, reviews decisions referred from the Court of Appeal.

The constitution nominally affords the judiciary full independence, but in practice the court system has

been subject to political influence. The judiciary’s independence was undermined during the 1980s, under

Mahathir Mohammed’s premiership. After a dispute over a court ruling on a political leadership race,

Mahathir proposed amendments to the constitution that withdrew the power of judicial review from the

High Courts and ended the separation of executive and judicial power. The overturning of sodomy

charges against former deputy Prime Minister Anwar Ibrahim in 2004, and his subsequent release after

six years in jail, indicate a growing judicial confidence in the post-Mahathir era.

Transparency levels are fairly high, and the legal system is seen as relatively supportive of business,

furnishing investors with sufficient powers of redress to feel comfortable. Cases of disputes involving

foreign investors are rare and the legal system has tended to handle claims amiably. If the local judicial

system fails to resolve a dispute, it is referred to the UN’s International Centre for Settlement of

Investment Disputes (ICSID). The Kuala Lumpur Regional Centre for Arbitration also offers international

arbitration for trade disputes.



Table: BMI's Asia Pacific Legal Framework Ratings

Investor protection Rule of law Contract enforcibility Corruption

Afghanistan 34.8 0.6 17.4 23.3

Bangladesh 61.1 25.1 8.0 3.3

Bhutan 25.6 75.4 57.0 82.0

Cambodia 51.2 13.8 38.9 6.0

China 7.8 50.3 54.7 54.7

East Timor 11.8 12.6 36.3 na

Hong Kong 62.5 89.8 87.5 92.7

India 38.0 62.9 8.9 54.7

Indonesia 22.3 25.7 26.5 18.0

Japan 58.3 89.2 90.5 91.3

Laos 44.8 19.8 28.7 28.7

Malaysia 53.8 72.5 47.8 75.3

Maldives 91.8 64.1 46.5 23.7

Myanmar na 4.8 na 1.3

Nepal 44.3 31.7 43.0 23.3

North Korea na 9.0 na na

Pakistan 56.2 26.9 17.5 8.7

Philippines 56.4 46.1 54.4 23.3

Singapore 64.5 94.6 75.9 98.7

South Korea 31.7 79.0 81.8 76.0

Sri Lanka 57.6 59.9 47.7 48.0

Taiwan 19.7 81.4 53.1 80.7

Thailand 19.5 60.5 60.1 62.0

Vietnam 22.8 49.7 45.6 28.7

Australia 27.9 94.0 89.2 95.3

New Zealand 66.9 97.0 82.4 100.0

Global average 36.8 48.8 49.9 40.2

Region average 43.0 51.4 50.0 50.0


Property Rights

Malaysian law ensures adequate protection of private property. Since 1998, all foreigners and foreign

businesses can purchase all types of property in Malaysia costing more than MYR250,000. The purchase



of any property by foreigners/foreign-owned companies requires the prior approval of the Foreign

Investment Committee.

The US Embassy in Malaysia has reported that it is not aware of any cases of uncompensated

expropriation of foreign-held assets by the Malaysian government. The government’s stated policy is that

all investors, both foreign and domestic, are entitled to fair compensation in the event that their private

property is required for public purposes. Should the investor and the government disagree on the amount

of compensation, the issue is then referred to the Malaysian judicial system.

The World Bank ranks Malaysia 81st among 181 countries for the ease of registering property, which

takes an average of 144 days, and 75th in starting a business, which involves nine government-required

procedures and takes an average of 13 days.

Intellectual Property Rights

Malaysia has one of the highest rates of illegal software usage in the Asia Pacific region, although the

situation seems to be improving. The International Intellectual Property Association estimated that piracy

caused losses of US$206mn in 2008, down 2.8% on 2007. Besides computer software, piracy of music

and entertainment media remains a particular problem.

Malaysia is in the process of bolstering its intellectual property rights (IPR) protection, with new laws and

improved enforcement. A special government task force has led a crackdown on piracy. In April 2007,

the prime minister announced plans for the development of a new National Intellectual Property Policy,

backed by a ringgit-denominated fund and the creation of a dedicated intellectual property court.

In 2003, Malaysia amended its laws to allow it to join the Patent Cooperation Treaty. It is also party to the

WTO’s Trade Related Intellectual Property (TRIPS) agreement. Malaysia is a member of the World

Intellectual Property Organization (WIPO), the Berne Convention and the Paris Convention for the

Protection of Industrial Property.

Corruption

Corruption is a key concern, despite substantial efforts from the government to crack down on bribery.

Foreign businessmen are asked to report any individuals who ask for payment in return for government

services. However, there are concerns that the government’s anti-corruption drive is running out of steam.

For example, the government has yet to deliver on recommendations from an April 2005 royal

commission on police reform and Malaysia has yet to ratify the UN Convention Against Corruption,

though it has signed it. Malaysia was ranked 47th among 180 countries in Transparency International’s

Corruption Perceptions Index in 2008.



Bureaucratic red tape is a concern, with one of the biggest bugbears being the difficulty foreign

companies have in securing work visas for expatriates. However, Malaysia is in some ways better placed

than other countries in the region. World Bank data shows that, at best, it takes around 13 days to start a

business in Malaysia, an improving figure which is faster than in regional investment rivals, China,

Vietnam and the Philippines.

Physical Infrastructure

Valued at US$5.6bn in 2008, the Malaysian construction industry seems set to see a phase of slow

growth. The industry recently stabilised after a period of regional weakness, and the global economic

slowdown has not helped. BMI is forecasting that the industry will grow at around 1.47% during 2009-

2013.

Under the Ninth Malaysia Plan (2006-2010), the state has set aside funds to the tune of MYR220bn

(US$60bn) for the infrastructure sector. Major projects planned or currently underway include the

US$14.5bn refinery projects at Yan and Bachok, the US$7bn Yan-Bachok oil pipeline, the US$5.74bn

city centre in Penang, the US$4.2bn Rawang-Ipoh rail project and the US$2.4bn Kuala Lumpur-

Singapore bullet train project.

The country’s local contractors - besides competently handling nearly all kinds of domestic projects -

have also ventured into other countries, including India. The growth of Malaysia’s infrastructure sector is

expected to be driven by the rapidly expanding tourism industry and increased demand for housing in the

country. Increased private sector participation in infrastructure development is expected to boost growth

further.

However, the Malaysian construction industry has to deal with impediments such as frequent bureaucratic

delays, fragmentation, low productivity levels and a lack of transparency in bidding. The government has

also been known to be biased towards local players, granting most contracts to local construction and

engineering firms. Foreign participation is encouraged only in areas that cannot be catered to efficiently

by local investment and expertise. Furthermore, the lack of skilled domestic labour has prevented the

country from taking up high-end construction assignments, and it still has to compete with low-wage

giants, including India and China. Despite this however, Malaysia has attracted significant foreign

investment. The Malaysian construction industry is forecast to be valued at MYR26.25bn (US$7bn) in

2012, making up nearly 3.19% of GDP.

With regards to the country’s transport links, Kuala Lumpur International Airport (KLIA), Malaysia’s

main international airport, is one of South East Asia’s major aviation hubs, along with Bangkok’s

Suvarnabhumi Airport and Singapore’s Changi Airport. By 2010, KLIA will have a new passenger

terminal for budget airlines, expanding the airport’s annual capacity to 55mn passengers. Many of

Malaysia’s smaller airports are also being expanded and improved, most recently the MYR36mn



(US$10.29mn) upgrade to the Bayan Lepas International Airport, and the MYR120mn (US$32.73mn)

expansion of the Malacca Batu Berendam Airport.

Meanwhile, the latest figures reveal that there are 50,214.6km of paved roads (including 1,471.6km of

expressways) in Malaysia, and 15,942km of unpaved roads. Prime Minister Abdullah Ahmed Badawi has

reported that MYR2.7bn (US$729.7mn) will be used for rural road connections and MYR900mn

(US$243.2mn) for the construction of village roads in the Ninth Malaysia Plan. The government has also

established a public transportation trust fund with an allocation of MYR4.4bn (US$1.19bn) to improve

the public transportation system, which will include, among other projects, the construction of the

proposed 18km Johor Bahru Eastern Dispersal Link in the South of Malaysia.

Efforts are also being made to establish the state of Penang as a logistics and transportation hub for the

Northern Corridor Economic Region. The local Penang port is planning to reclaim nearly 405 hectares of

land from the sea under the fourth phase of development of the North Butterworth Container Terminal in

Penang. The reclamation work, along with the entire fourth phase of development, is likely to cost about

MYR3.2bn (US$919.64mn) and take 10 years to complete. As another measure towards consolidating

Penang’s position as a transportation hub, the authorities are planning to privatise Penang port.

Labour Force

Malaysia’s labour force numbers 11.21mn out of a population of some 28.3mn, a participation rate below

50%. Unemployment is low at around 4.0%. More than half of the workforce is employed in the

burgeoning service sector, just over one-third in industry and around 13% in agriculture.

The rapidly growing economy has led to increased demand for skilled labour, of which there is a

shortage. This shortage of skilled workers is expected to remain a long-term problem, especially given the

shift in production to higher value-added products and more sophisticated processes. While primary

education is near universal, the quality of higher education is considered to be relatively poor. The

manufacturing and construction industries have traditionally relied on imported unskilled labour from

Indonesia and other South East Asian countries.

Periodically, Malaysia’s government introduces measures to protect the local Malay work force, for

example by implementing freezes on hiring foreign workers. In 2005, the government forcibly repatriated

all illegal workers in Malaysia, with up to 400,000 people removed. It still seems to have had little effect,

with the number of registered foreign workers climbing by more than 10% a year since then.

The Malaysian labour force is comparatively lightly regulated, judging by the World Bank’s Employment

Laws index. There are no nationwide or industry-wide standards for fixing wage rates, and there is no

legal minimum rate. Affirmative-action policies oblige firms to employ Bumiputeras (Malays and other

indigenous peoples) at all levels, in proportions reflecting the local ethnic composition. The government



also rigorously monitors hiring practices to ensure that all foreign employers strive to meet guidelines

designed to ensure a racial balance in employment. All foreign-invested firms are also required to set up

training programmes for their Malaysian staff.

Malaysia enjoys stable industrial relations, with a tradition of consensus between management and labour.

Trade union rights are heavily circumscribed. Strikes are actively discouraged and many disputes are

arbitrated through an industrial court (though many cases can remain stuck in the court process for years).

Once a case is referred to the industrial court, workers are forbidden to engage in industrial action. As a

result, strikes are very rare in Malaysia.

National trade unions are proscribed, although there are a number of national confederations of trade

unions and in-house unions at individual companies. There are no unions representing workers in the

electronics sector. Furthermore, high-ranking union leaders and their organisations are forbidden from

engaging in political activity.

Foreign Investment Policy

Following the economic slump of the late 1990s, the encouragement of FDI is now a major plank of

government policy. The Malaysian government encourages FDI by providing a number of incentives,

particularly in export-oriented high-tech industries such as electronics and ‘back office’ service

operations. These include allowing 100% foreign equity ownership in the manufacturing sector, and tax

exemptions awarded through achieving pioneer status or via the investment tax allowance scheme. The

government also hosts regular international trade shows and advertises broadly to attract FDI.

The Malaysian Industrial Development Authority (MIDA) vets all proposals for manufacturing projects.

Investment in other sectors is handled by relevant agencies. The regulatory framework for investments is

laid out in the Promotion of Investments Act of 1986 (PIA) and the Industrial Co-ordination Act of 1975.

A more concise framework has been promised, but has yet to emerge.

Total foreign ownership is now permitted in the manufacturing sector. In 2003, a requirement for

manufacturers to export a minimum proportion of output was removed. Since 1998, foreign investors

have been permitted to hold up to 61% of telecoms companies. Foreign entities can also hold 70% of

shipping companies, 51% of insurance firms and 49% of forwarding agencies. However, in many sectors

foreign stakes are restricted and joint ventures are the norm.

Incentives are provided in selected industries. For example, foreign investors in the Multimedia Super

Corridor (MSC) high-tech investment zone near Kuala Lumpur benefit from tax and regulatory breaks.

Biotechnology and tourism are among other sectors where FDI is actively pursued with incentives.



Areas where FDI is less of a priority include financial services, agriculture and construction. Foreign

investment in the oil and gas industries is also restricted and is arranged mainly through production

sharing agreements. High import tariffs are also applied to protect some industries, notably vehicle

manufacture.

Malaysia has Free Zones (FZs) for export-oriented production and warehousing. These are split into Free

Industrial Zones (FIZ), for manufacturing and assembly, and Free Commercial Zones (FCZ), for

warehousing commercial goods. Those operating in the zones must use mainly imported inputs and

export 80% or more of their production. There were 13 FIZs and 12 FCZs at the end of 2006.

The government promotes the use of the ‘Bumiputera’ principle, which encourages ventures with local

partners to better reflect the country’s ethnic composition. However, the New Development Policy (still

widely known as the New Economic Policy, or NEP), established with the aim of eradicating poverty

through the redistribution of wealth in favour of ethnic Malays (otherwise known as ‘Bumiputeras’) often

acts as a major barrier to entering domestic markets, especially with respect to winning lucrative

government contracts. However, Prime Minister Najib Nazak subsequently announced sweeping

measures in June 2009 to further liberalise the Malaysian economy in a bid to attract foreign capital

inflows into the country. Among the most notable changes, the rule requiring firms seeking to list on

Bursa Malaysia to reserve 30% of its equity base for bumiputera - ethnic Malay - investors has been

removed. However, a 50% public shareholding spread requirement has been put in place as a watered-

down form of affirmative action, in order to avoid a backlash from its Malay supporters.

FDI inflows have been an upward trajectory, rising 53% in 2008 to US$12.9bn in 2008. However, this

figure is likely to fall in 2009 due to the global economic downturn impairing investment. Moreover,

Malaysia faces stiff competition from strong regional rivals, such as China and India, as lower-wage

manufacturing is becoming less competitive and the government remains reluctant to enact the reforms

needed to attract higher-tech industries. UNCTAD ranked Malaysia as the sixth largest destination for

FDI in 1995; based on 2006 figures, Malaysia now ranks 62nd.

Domestic earnings by foreigners, including salaries, interest payments, and dividends, may be transferred

to foreign currency and repatriated abroad.

Table: Annual FDI Inflows Into Asia, 2006-2008

2006 2007 2008

US$bn US$ per capita US$bn US$ per capita US$bn US$ per capita

Australia 25.74 1,255.4 22.27 1,075.7 46.77 2,227.3

Bangladesh 0.79 5.7 0.67 4.7 1.09 7.6

Cambodia 0.48 34.2 0.87 60.3 0.82 55.8



Table: Annual FDI Inflows Into Asia, 2006-2008

2006 2007 2008

US$bn US$ per capita US$bn US$ per capita US$bn US$ per capita

China 72.72 55.3 83.52 62.5 108.31 80.4

Hong Kong 45.05 6,520.6 59.90 8,602.3 63.00 9,000.4

India 19.66 17.3 22.95 19.9 41.55 36.0

Indonesia 4.91 21.5 6.93 29.9 7.92 33.8

Malaysia 6.05 231.6 8.40 316.2 8.05 298.3

Pakistan 4.27 27.5 5.33 34.0 5.44 33.8

Philippines 2.92 33.9 2.93 33.3 1.52 16.9

Singapore 24.74 5,646.5 24.14 5,441.2 22.72 4,695.1

South Korea 4.88 101.6 2.63 54.6 7.60 156.4

Sri Lanka 0.48 24.0 0.53 26.0 0.75 38.8

Taiwan 7.42 324.0 8.16 354.8 5.43 236.2

Thailand 9.01 142.0 9.58 149.9 10.09 156.9

Vietnam 2.36 27.5 6.74 77.5 8.05 92.7

Source: UNCTAD, BMI

FDI Regime

Malaysia has been a member of the WTO since its creation in 1995, and was a founding member of the

Association of Southeast Asian Nations Free Trade Area (AFTA) in 1992, along with Brunei, Indonesia,

the Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar followed in 1997

and Cambodia became the most recent addition in 1999. The primary goals of the AFTA are to increase

the ‘region’s competitive advantage as a production base geared for the world market’ through the

elimination - within ASEAN - of tariffs and non-tariff barriers, and to attract more FDI to ASEAN.

Malaysia has also entered into an FTA with Pakistan, which came into effect on January 1 2008, and is

engaged in an FTA with Japan (which came into effect in mid-2006) and South Korea via the ASEAN-

Korea FTA. An FTA in goods between ASEAN and South Korea came into force on June 1 2007, while

an Agreement on Services was signed on November 21 2007 during the ASEAN-Korea Summit in

Singapore. The Agreement on investment is currently being negotiated. Malaysia is also conducting

ongoing negotiations with Chile, Australia, New Zealand, and notably the US, to establish yet more

FTAs, although as yet no definite timelines have been established for the completion of any such

agreements.



Table: BMI's Asia Pacific Trade Ratings

Protectionism Bureaucracy

Afghanistan na 21.6

Bangladesh 0.7 22.9

Bhutan 4.2 18.3

Cambodia 7.5 25.4

China 51.7 52.9

East Timor na 40.5

Hong Kong 100.0 98.6

India 12.9 23.0

Indonesia 54.4 44.3

Japan 76.9 81.5

Laos 19.7 6.7

Malaysia 64.6 50.9

Maldives na 55.3

Myanmar 1.4 na

Nepal 13.6 34.1

North Korea 4.2 2.3

Pakistan 16.3 42.9

Philippines 76.2 66.9

Singapore 100.0 88.9

South Korea 42.2 69.1

Sri Lanka 48.3 35.6

Taiwan 95.9 64.1

Thailand 55.8 37.6

Vietnam 11.6 44.0

Australia 70.7 80.3

New Zealand 72.1 76.3

Global average 47.1 45.2

Region average 43.5 47.4




Table: Malaysia’s Top Export Destinations, 2001-2008 (US$mn)

2001 2002 2003 2004 2005 2006 2007 2008

Singapore 14,912.9 15,958.5 16,522.6 18,993.8 22,009.6 24,743.9 25,771.5 34,247.0

US 17,815.8 18,826.4 20,539.5 23,748.5 27,763.5 30,190.5 27,530.9 28,321.1

Mainland China 3,821.0 5,253.5 6,810.0 8,460.1 9,303.1 11,646.1 15,451.8 27,447.9

Japan 11,769.5 10,529.6 11,221.7 12,777.0 13,181.2 14,241.1 16,090.6 21,075.9

Thailand 3,360.0 3,972.2 4,615.3 6,040.5 7,584.6 8,501.8 8,729.7 9,050.5

Top five, % of total 58.59 58.4 56.88 55.35 56.63 55.6 53.1 55.25

Total exports 88,204 93,388. 104,971 126,513 140,980 160,666 176,213 217,448

NB Total exports is from the IMF’s Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report. Source: IMF

Tax Regime

Malaysia’s tax regime is seen as fairly typical of its regional peers. The current sales tax and service tax

are to be replaced by a new goods and services tax, but its implementation, originally set for early 2007,

has been delayed. Corporate tax rates are being reduced and there are plans to reduce individual tax.

Corporate tax: the main rate was cut by one percentage point to 25% in 2009. Tax is payable only on

income from Malaysia for both residents and non-residents. Lower rates are payable in the Labuan

offshore financial centre. An equalisation tax is deducted from dividends paid by companies. A 10-year

tax exemption exists for venture capital companies investing at least 50% of their investment funds in

seed capital.

Individual tax: residents are taxed at progressive rates up to 27%. Non-residents are taxed at a flat rate of

27%. Tax is payable only on income from Malaysia for both residents and non-residents. Remittances

from foreign sources into Malaysia by resident or non-residents are not taxable.

Sales tax: the standard rate is 10%. A 5% rate applies to some foodstuffs, building materials and timber.

Cigarettes and liquor are taxed at rates of 20% and 25% respectively. There is no sales tax on computers

and computer components, basic medical equipment, bicycles, mineral products and some food items. A

5% service tax is payable on some goods or services. All manufacturers and importers are subject to the

sales tax, where applicable.

Capital gains: Malaysia scrapped its capital gains tax on property in April 2007. Before that point, a

complex system existed, under which foreign buyers were liable for a 30% tax for the first five years and

a 5% tax from then on.



Security Risk

There is a general threat from terrorism in Malaysia. The British Foreign and Commonwealth Office

(FCO) warns that attacks could be indiscriminate, including in places frequented by expatriates and

foreign travellers. However, Malaysia has not seen the high profile attacks experienced by many of its

regional neighbours, although Jemaah Islamiyah, which has been linked to attacks in Indonesia,

reportedly maintains a presence.

The most notable attacks in recent years have been aimed largely at foreign tourists in the islands and

coastal areas of Eastern Sabah, the blame for which has largely fallen on Abu Sayaf, a terrorist group

based in the southern Philippines. Previous kidnappings in this area include the taking of foreign tourists

and local hostages from the Malaysian Island of Sipadan in 2000, and of foreign resort workers from a

resort near Lahad Datu in 2003. On April 12 2004 a Malaysian vessel was hijacked and three crew

members taken hostage just outside Malaysian waters off the eastern coastline of Sabah. The Malaysian

government has increased security in the region, but there is still a continuing risk of further incidents.

The overall crime rate in Malaysia is rated as medium by the US Overseas Security Advisory Council

(OSAC). Violent crime against expatriates is relatively uncommon, with most criminal activity directed

against foreigners limited to non-violent crimes such as petty theft, purse snatching and credit card fraud.



Industry Forecast Scenario

In 2009, Malaysian petrochemicals capacities remained unchanged from the previous year. In the olefins

segment, the country had capacities of 1.74mn tpa ethylene, 1.13mn tpa propylene and 100,000tpa

butadiene. Intermediate petrochemicals production capacities include 240,000tpa styrene, 440,000tpa

vinyl chloride monomer, 550,000tpa xylenes and 380,000-385,000tpa EO/EG. In the polymers segment,

there was 975,000tpa PE (120,000tpa HDPE, 475,00tpa LDPE and 380,000tpa LLDPE), 560,000tpa PP,

260,000tpa PVC, 215,000tpa PET and 140,000tpa PS. In the fertiliser segment, Malaysia has capacities of

1.32mn tpa ammonia and 1.34mn tpa urea. It also hosts 1.77mn tpa of methanol capacity, with Petronas

subsidiary Petronas Methanol (Labuan) dominating the market following the completion of its massive

methanol complex in Q308. The same year saw PP capacity increase 100,000tpa at Titan Chemicals’ site

at Pasir Gudang, Johor. There are few major expansions in the Malaysian petrochemical sector planned

over the next five years. BMI does not envisage an increase in ethylene and polymer capacities over the

forecast period.

Increased productivity and expansion in industry output over recent years have resulted in improved

export performance. Malaysia continues to attract foreign investment, but the industry is reassessing its

competitive status within the ASEAN and the ‘threat’ posed by China’s rapid industrial expansion. The

petrochemical industry is facing tougher market conditions with falling product prices, slowing demand

growth and a massive increase in capacities in Asia and the Middle East. In order to sustain production

volumes, Malaysian producers will need to constrain feedstock costs. In the face of intensified

competitiveness in the global market, prospects for the Malaysian petrochemicals industry depend on its

ability to cultivate and maintain competitive advantages over other competing nations.

In the short term, overcoming feedstock shortages and mechanical hitches are likely to be at the forefront

of operators’ agendas. The utilisation of the country’s considerable ethane reserves is crucial to

maintaining competitiveness. This will be bolstered by the development of its LNG sector. The use of

naphtha as feedstock has resulted in unstable feedstock prices, and thus affected petrochemical demand in

the domestic market. Such a situation would continue until the prices stabilise, in spite of the vast

domestic reserves that Malaysia holds.

The Third Industrial Development Plan (IMP3, 2006-2020) envisages further expansion in the industry

and seeks to enhance competitiveness. Development investment to the tune of MYR34bn (US$9.99bn)

will be made during the plan period as against the MYR27.8bn (US$8.17bn) approved under the second

master plan (1996-2005). The IMP3 targets petrochemicals exports worth approximately MYR20.4bn

(US$5.99bn) by 2010, MYR27.6bn (US$8.11bn) by 2015 and MYR36.7bn (US$10.79bn) by 2020. The

plan also calls for the construction of three new crackers by 2020.



Table: Malaysia’s Petrochemicals Sector, 2007-2014 (‘000 tpa, unless otherwise stated)

2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Oil production, ‘000 b/d 755.3 775.0 790.0 770.0 750.0 720.0 705.6 na

Oil consumption, ‘000 b/d 513.9 519.0 524.2 532.1 540.1 550.9 561.9 na

Oil exports, ‘000 b/d 241.4 256.0 265.8 237.9 209.9 169.1 143.7 na

Gas production, bcm 60.5 65.5 71.0 77.0 78.0 80.0 85.0 na

Gas consumption, bcm 28.3 30.7 31.5 32.5 33.0 34.5 35.2 na

Gas exports, bcm 32.2 34.8 39.5 44.5 45.0 45.5 49.8 na

Refining capacity, ‘000 b/d 515.0 625 625 625 625 700 700 na

Acrylonitrile-butadiene-styrene na 350 350 350 350 350 350 350

Ammonia capacity na 1,320 1,320 1,320 1,320 1,320 1,320 1,320

Benzene capacity na 330 330 330 330 330 330 330

Butadiene capacity na 100 100 100 100 100 100 100

Ethylene capacity 1,740 1,740 1,740 1,740 1,740 1,740 1,740 1,740

Ethylbenzene capacity na 220 220 220 220 220 220 220

Ethylene glycol na 380 380 380 380 380 380 380

Ethylene oxide na 385 385 385 385 385 385 385

HDPE capacity 120 120 120 120 120 120 120 120

LDPE capacity 475 475 475 475 475 475 475 475

LLDPE capacity 380 380 380 380 380 380 380 380

PE capacity 975 975 975 975 975 975 975 975

PET capacity na 215 215 215 215 215 215 215

Propylene capacity na 1,125 1,125 1,125 1,125 1,125 1,125 1,125

PP capacity 560 560 560 560 560 560 560 560

Styrene capacity na 240 240 240 240 240 240 240

PS capacity 140 140 140 140 140 140 140 140

Vinyl chloride na 440 440 440 440 440 440 440

PVC capacity 260 260 260 260 260 260 260 260

Xylenes capacity na 550 550 550 550 550 550 550

Methanol capacity na 1,770 1,770 1,770 1,770 1,770 1,770 1,770

Urea na 1,340 1,340 1,340 1,340 1,340 1,340 1,340

f = BMI forecast; na = not available/applicable. Source: Titan,Ethylene Malaysia,World Cracker Report, CMAI (PE/PP annual growth rates)



Macroeconomic Outlook

Outlook For 2010 Brightens Following Encouraging Q209 Data

The outlook for the Malaysian economy for 2010 has improved significantly, as the effects from fiscal

stimulus and monetary easing kick in. We are maintaining our forecast that real GDP will shrink by 3.4%

in 2009, before staging a mild rebound in 2010 to grow by 2.7%. Nonetheless, despite this more sanguine

outlook we highlight that Malaysia's huge fiscal deficit will remain a key concern.

The outlook for the Malaysian economy is looking more rosy heading into 2010 after it emerged from

technical recession in Q209, with real GDP expanding by a strong 4.8% q-o-q, having contracted by 7.8%

in Q109 and by 3.4% in Q408. On a y-o-y basis this translated into a 3.9% fall in real output, but this

nonetheless represented a marked improvement on Q109 when the economy shrunk by a massive 6.2%.

With the government’s fiscal stimulus and monetary easing taking effect in H209, and signs that the

global economy is on the verge of a turnaround, it appears that the worst of the downturn has now passed.

Indeed, signs of an impending recovery from a slew of domestic economic indicators suggest that the

country is likely to register positive y-o-y GDP growth perhaps as early as Q409. According to the central

bank, the upbeat data means that there are upside risks (stronger than expected growth) to the

government’s forecast of GDP contracting by between 4-5% in 2009. Meanwhile, we are retaining our

already more optimistic projection that GDP will shrink by 3.4% in 2009, before staging a mild rebound

at 2.7% in 2010.

The uptick from the trough of the downturn in Q109 is echoed by other economies in the region including

Singapore (-3.5% y-o-y in Q209, compared to -9.5% y-o-y in Q109), Thailand (-4.9% y-o-y in Q209,

compared to -7.1% y-o-y in Q109) and the Philippines (1.5% y-o-y in Q209, compared to 0.6% y-o-y in

Q109). That said, we caution that the road to recovery is unlikely to be a smooth ride, with economic

activity set to remain subdued through to the second half of 2010.

Government Expenditure To Pick Up Strongly In H209 And 2010

We expect a sharp ramp up in government consumption in H209, which may persist into 2010.

Government spending only rose by 1.0% y-o-y in Q209 (worse than the 2.1% increase in Q109)

following the slow disbursement of fiscal stimulus. However, Deputy Prime Minister Muhyiddin Yassin

indicated on August 9 that the funds from the MYR67bn fiscal stimulus package have all been allocated,

paving the way for more disbursements over the coming months. We are projecting government

consumption growth to reach 5.0% in 2009, and we believe this level will be maintained in 2010.

Private consumption, meanwhile, was surprisingly resilient in Q209, growing by 1.0% y-o-y after falling

by 0.7% in the preceding quarter. However, it cannot be counted on to drive economic growth in H209.

Indeed, given that unemployment levels usually lag the economic cycle, we are anticipating the



unemployment rate to worsen to 4.8% by end-09 from 4.0% in Q109. This means that private

consumption is likely to be depressed in the coming two quarters, hence our view that private

consumption will fall by 1.5% in 2009, before rebounding to grow by 3.0% in 2010.

Investment remained predictably weak, declining by 9.8% y-o-y in Q209, only a marginal improvement

from the 10.8% drop registered over the previous three months. Although we are expecting an

improvement in economic conditions, and highlight that monetary easing has lowered the cost of

borrowing, businesses are likely to hold back on capital expenditure until clearer signs of a recovery

materialise. As such, we are expecting 2009 investment to shrink by a large 8.0%, before returning to

positive growth of 2.5% in 2010.

Weak External Demand Likely To Persist, But Improving Trend Seen

External demand continued to weaken in Q209, with exports contracting by 17.3% y-o-y, worsening from

the 15.2% decline posted in Q109. Meanwhile, the pace of decline of imports slowed to 19.7% in Q209,

from 23.5% y-o-y in the previous quarter. We expect Q209 to mark the bottom for the current slump in

exports, especially given the improving macroeconomic data from abroad in recent months, which should

translate into greater demand for Malaysian goods in the coming quarters. In addition, imports have

improved. With intermediate goods making up close to 70% of total goods imports, we argue that the

uptrend in imports points to greater outbound shipments in the coming months.

That said, although we expect a revival in external demand, a sharp pick up is unlikely, especially given

bearish growth forecast for the US and the eurozone of -2.7% and -4.3%, respectively, in 2009, and 1.9%

and 0.4% in 2010. We are projecting net exports to fall by 20% in 2009 and remain flat in 2010.

Outlook Clouded By Massive Budget Deficit

The issue of Malaysia’s ballooning budget deficit has yet to be addressed. With the large stimulus, the

budget deficit is expected to reach a whopping 7.9% of GDP in 2009. Although we are anticipating that

the fiscal shortfall will shrink going forward, it will remain a sizable 5.0% of GDP in 2013, raising

questions about the country’s fiscal sustainability. Unless the government is able to curb the persistent

large deficit, the upcoming economic recovery will be clouded by budget woes.

In order to address this, it is imperative that the government takes greater steps to enhance its revenue

collection. However, it was recently announced that Malaysia is likely to postpone its plans to impose a

goods and service tax (GST) in the upcoming 2010 budget, according to Edge Financial Daily, despite

the IMF’s warning in early August to not delay its implementation. Prime Minister Najib Razak is,

however, expected to announce a timeframe for the introduction of the new tax when he presents the

budget at the end of October 2009.



On a more positive note, however, the government is looking to reduce operating expenditure by 15% in

2010 by cutting down on travelling by government officials and reducing costs through public tenders of

government projects. However, we are not convinced that these measures will be sufficient to make a

strong positive impact in reducing the budget deficit. Indeed, we still expect the budget deficit to reach

6.9% of GDP in 2010. Thus, widening its tax net to boost revenue and reduce its dependence on oil and

gas taxes (which make up more than 40% of government revenue), remains the key to solving the

country’s chronic budget deficit problem. With this in mind, the GST and its implementation will be a

crucial issue.

Table: Malaysia – Economic Activity, 2o07-2014

2007 2008 2009f 2010f 2011f 2012f 2013f 2014f

Nominal GDP, MYRbn 1 641.9 698.3 686.6 724.8 781.7 842.9 906.0 963.6

Nominal GDP, US$bn 1 187.90 206.76 196.17 210.09 235.09 263.39 297.06 326.66

Real GDP growth, % change y-o-y 1 6.2 4.6 -3.4 2.7 4.5 4.8 4.6 4.5

GDP per capita, US$ 1 7,071 7,650 7,140 7,525 8,291 9,149 10,169 11,023

Population, mn 2 26.6 27.0 27.5 27.9 28.4 28.8 29.2 29.6

Industrial production index, % y-o-y, average 1 2.3 3.1 -1.8 2.0 3.5 4.5 4.7 4.7

Unemployment, % of labour force, end of period 2 3.2 3.3 4.8 4.4 3.7 3.7 3.7 3.8

f = BMI forecast. Source: 1 Bank Negara Malaysia, BMI; 2 OEF



Company Monitor

Petronas

Malaysia’s state-owned Petronas is an integrated company, and the

nation’s second-largest producer of oil and gas. The group’s assets

include two refineries in Malaysia with a combined capacity of

303,500b/d. Its petrochemicals plants are located at Kerteh and

Gebeng on the eastern corridor of peninsular Malaysia, where

Petronas is actively pursuing the development of fully integrated

petrochemicals complexes with common infrastructural facilities. The

player’s petrochemicals products are marketed via wholly owned

subsidiary Malaysian International Trading Corporation (MITCO).

Petronas has embarked on large-scale petrochemicals projects with

multinational JV partners at its Kerteh and Gebeng complexes. The

Kerteh complex includes: a 400,000tpa ethylene plant that is a JV

between Petronas, Idemitsu Petrochemicals and BP; a 200,000tpa

HDPE/LLDPE plant; a 50,000tpa pipe compounding plant with BP

Chemicals; a 400,000tpa VCM plant and a 150,000tpa PVC plant co-

owned by Mitsui; 450,000tpa of ammonia capacity; a facility for

325,000tpa of syngas; 145,000tpa of benzene capacity; a second

cracker with 600,000tpa of ethylene and 90,000tpa of propylene

capacity co-owned with Dow and Polifin; 140,000tpa of butanol and

50,000tpa of butyl acetate capacities, all shared with Dow; 85,000tpa

of ethoxylates; 85,000tpa of ethanolamines; 60,000tpa of glycol

ethers, and a 255,000tpa LDPE JV with South Africa-based Sasol

Polymers and Sabic Polyethylenes.

At Gebeng, Petronas operates 300,000tpa of MTBE capacity;

80,000tpa PP; 380,000tpa propylene; 160,000tpa crude acrylic acid;

20,000tpa glacial acrylic acid, 100,000tpa butyl-acrylate and

60,000tpa 2-ethyl hexyl acrylate in conjunction with BASF; 80,000tpa

2-ethyhexanol; and 40,000tpa phthalic anhydride, 100,000tpa

plasticisers, 160,000tpa butanols, 170,000tpa syngas and 100,000tpa

butanediol (BDO), also with BASF.

Petronas also manages and operates a methanol plant in Labuan.

The plant produces 660,000tpa methanol, using 1.5Mcm of gas per

day as feedstock. The player also has operations in Indonesia,

Vietnam and the Philippines, including a 100,000tpa PVC plant in

Vietnam that is a JV with PetroVietnam Gas and Vietnam-based

Tramatsuco, and a 250,000tpa PE plant in the Philippines in

conjunction with BP and Japanese conglomerate, Sumitomo.

Address

Petronas - Petroliam Nasional Bhd Tower 1, Petronas Twin Towers Kuala Lumpur City Centre 50088 Kuala Lumpur Malaysia

Tel: +60 (3) 20515000

Fax: +60 (3) 2026 5050

Web: www.petronas.com.my

Key Statistics

Group net profit (year ended March 31 2008): MYR61bn (US$18.1bn)

No. of employees: 30,000

Year established: 1974



It was reported in May 2007 that the company plans to close down its

propylene-MTBE swing plant Kuantan for a maintenance turnaround

in December 2007. The exact date of the closure has not announced.

In November 2006, Petronas signed a US$32.5bn contract to supply

LNG to Shanghai for 25 years, at the rate of US$6.34 per million

British thermal unit (mbtu). The LNG shipment would start in 2009.

In October 2006, Petronas reportedly teamed up with three Korean

firms Korea Gas, Samsung and LG International to explore

hydrocarbons in the Joint Petroleum Development Area (JPDA)

between Timor Leste and Australia. Petronas and its partners were

awarded a production-sharing contract (PSC) by the Timor Sea

Designated Authority (TSDA) for an offshore exploration block.

Petronas holds a 50% stake in the project and is to be the operator of

the block. The remaining 50% is shared between Korea Gas (30%

stake), Samsung (10%) and LG International (10%).

The company, through its subsidiary Petronas Penapisan, awarded a

contract to build a base oil plant to a consortium of local and foreign

firms in March 2006. Lurgi of Germany, Larsen & Toubro of India,

Kejuruteraan QKS and L&T-ECC Construction of Malaysia will

undertake the engineering, procurement, construction and

commissioning (EPCC) works for the facility. The plant would be built

at Petronas’s refinery complex in Malacca.

In March 2006, the company signed a 20-year contract with Japanese

firm Toho Gas to supply 520,000tpa of LNG to Japan from 2007.

Financial Highlights

In FY2008/09 (ending March 31 2009), Petronas reported net income

down 12.54% y-o-y to MYR578.67mn despite a 9.26% increase in

revenues from MYR22.30bn to MYR24.37bn. An increase in the cost

of goods sold as a percentage of sales from 91.93% to 92.97% was a

component in the falling net income despite rising revenues.



Titan Chemicals

Titan Chemicals began as a JV between the Chao Group (with

operations in Thailand and the US) and Malaysia-based Permodalan

Nasional Berhad (PNB). It was listed on the Main Board of Bursa,

Malaysia on June 23 2005. Titan built Malaysia’s first and largest

integrated petrochemicals complex. The company presently owns the

largest integrated polyolefins production capacity in South East Asia.

It is also the first Malaysian company to produce olefins and

polyolefins. The Chao group also wholly owns US chemicals firm,

Westlake, and has a range of chemical interests in Taiwan and China.

The company recorded a dominant 38% share in the Malaysian

polyolefins sales volume in 2007 and noted a 30% share in the

Indonesian combined LLDPE and HDPE markets.

In September 2008, Titan Chemicals opened a new subsidiary in

Dubai to exploit supply chain and opportunities in the Middle East

region.

As reported in March 2007, PNB has sold 150mn shares in Titan

Chemicals. The company’s direct stake in Titan Chemicals now

stands at 6.94%.

Titan Chemicals presently operates eight plants on two integrated

sites at Pasir Gudang and Tanjung Langsat in Johore, which are

connected by a 12km network of pipelines.

Titan produces ethylene, propylene, PE and PP. The group has

invested about MYR6bn (US$1.59bn) in its petrochemicals facilities in

Johore. Titan is one of the largest single-site polyolefin producers in

South East Asia, with claimed ethylene and propylene capacity

reaching 646,000tpa and 342,000tpa respectively and polymer

capacity of 900,000tpa. The company exports over half of its output,

and sells the balance to local manufacturers such as Century Bond

and the Evermal Resources Group.

The company operates a 220,000tpa LDPE plant, has a 200,000tpa

nameplate capacity LLDPE/HDPE swing plant and a 105,000tpa

HDPE plant at its Pasir Gudang Petrochemicals Complex in Johore,

southern Malaysia.

As demand continues to outstrip supply in China, and with its entry

Address

Titan Chemicals Corp. Bhd 6/F, Bangunan Malaysia Re 17, Jalan Dungun Damansara Heights 50490 Kuala Lumpur Malaysia

Tel: +60 (3) 2093 4222

Fax: +60 (3) 2093 5688

Web: www.titangroup.com

Key Statistics

Pre-tax profit (year ended March 31 2008): US$28.36bn

No. of employees: 1,005



into the WTO, Titan has planned several expansions in Malaysia to

cater to the newly available market. Its PP plant capacity is likely to

be increased by 130,000tpa by 2007 in Malaysia. The company is

also establishing a 100,000tpa butadiene plant.

Titan’s main products are PP and PE, two of the most widely used

and rapidly growing plastics in the world. The company has

developed three new products called Titanpro Medium-Flow Impact

PP, Titanpro High Clarity PP and Fast Cycle PP.

Malaysia-based Titan Petrochemicals (TPC), a wholly owned

subsidiary, was incorporated in 1988, and is primarily involved in the

production of ethylene and propylene. TPC owns and operates the

two naphtha/ LPG. By-products of its cracker facility include: pyrolysis

gasoline, gaseous fuel and fuel oils.

Polysius Engineering (an associated company of Krupp UHDE of

Germany) completed a unique benzene, toluene and xylene (BTX)

plant in Malaysia in January 2000. The plant has a nameplate

capacity of 130,000tpa of benzene and 70,000tpa of toluene.

Malaysia-based Titan Polyethylene (TPE), another wholly owned

subsidiary, was incorporated in 1988. TPE is primarily involved in the

production of LDPE, LLDPE, HDPE and metallocene LLDPE

(mLLDPE). TPE owns and operates the swing line HDPE/LLDPE

plant (TPE 1), employing the US-based Union Carbide’s Unipol

process technology, and has a current nameplate capacity of

200,000tpa. TPE also owns and operates a 220,000tpa LDPE plant

(TPE 2), which was established by Mitsui Engineering & Shipbuilding

using ExxonMobil’s tubular technology. TPE 2 produces a wide range

of LDPE resins, including grades that can be used to produce a

superior clarity film, a major market segment for LDPE resins in

Malaysia.

A 105,000tpa HDPE plant (TPE 3) was established by Technip

Geoproduction (Malaysia) at Tanjung Langsat in 2000. It produces

higher-value-added HDPE resins that are used in the production of

high-quality films and high-quality water and gas pipes. Ethylene

feedstock for these three plants is provided by pipeline directly from

the group’s crackers or from the group’s cryogenic storage facilities

adjacent to Johore Port.

Titan Chemicals operates two PP facilities. The first PP plant was



completed in December 1991, while the second plant, developed at a

cost of about US$96mn, commenced commercial operation in

September 1999. The PP plants obtain most of their propylene by

pipeline from TPC, with the balance being imported.

In early 2008, Titan Chemicals started up its new metathesis plant at

its integrated industrial site in Pasir Gudang, Johor. The facility, which

produces 115,000tpa of propylene provides additional feedstock to

the PP facility. The PP facility increased its production capacity at its

Malaysian site by 100,000tpa to 480,000tpa in 2008 to cater to the

expanding Malaysian and Indonesian markets.

In March 2006, Titan Chemicals, through subsidiary Titan Petchem,

acquired Indonesia’s PT Petrokimia Nusantara Interindo (Peni) for

US$78mn. It paid US$20mn in cash and assumed US$58mn of

Peni’s bank debts.



BASF

BASF began production in Malaysia through a textile auxiliaries and

printing inks joint venture. BASF (Malaysia) has operating companies

and JVs, including plants, in the states of Selangor, Johore and

Penang. Its polyurethane system company, feed vitamin premix plant

and masterbatch business are all located within the Klang Valley. At

Pasir Gudang, Johore, it has a Styropor plant, a Tamol plant and an

engineering plastics compounding plant. In conjunction with Petronas,

it operates 20,000tpa of glacial acrylic acid capacity, 160,000tpa of

crude acetic acid capacity, 100,000tpa of butyl acrylate capacity,

80,000tpa of 2-E hexanol capacity and 40,000tpa of phthalic capacity,

all at Gebeng.

A 60,000tpa PBT plant at the Kuantan Petrochemicals Complex was

commissioned in June 2006. The US$40mn plant is a 50-50 JV

between BASF and Japan’s Toray Industries.

Address

BASF (Malaysia) Sdn Bhd - Head Office No. 2, Jalan U8/87 Seksyen U8, Bukit Jelutong Shah Alam 40706 Selangor Malaysia

Tel: +60 (3) 5628 3888

Fax: +60 (3) 5628 3777

Web: www.basf.com.sg



Dow Chemical

Dow Chemical (Malaysia) is the marketing and sales office for Dow

products in Malaysia. This office is also responsible for technical

service and development in the fields of polyurethanes, PE and epoxy

for the whole ASEAN region. Dow operates business centres in

Petaling Jaya and Kuala Lumpur, and is involved in the Optimal

Olefins, Optimal Chemicals and Optimal Glycols JVs with Petronas at

the Kerteh complex. The firm also has an R&D centre at Shah Alam

and a manufacturing site at Seremban.



BP

BP is active in Malaysia’s downstream oil and petrochemicals

segments. It has interests in two plants at the Kerteh complex. The

Kerteh acetic acid plant is a JV between BP and Petronas. The site

uses BP’s proprietary Cativa catalyst process technology in the

continuous carbonylation of methanol to produce about 500,000tpa of

acetic acid. Petronas operates a PE plant that uses BP’s Innovene

technology under licence to produce LLDPE and HDPE for the local

markets. BP also operates a wholly owned 600,000tpa PTA plant at

Gebeng.

Address

BP Malaysia Sdn Bhd 35/F, Menara Mascis Kuala Lumpur City Centre 50088 Kuala Lumpur Malaysia

Tel: +60 (3) 2059 5555

Fax: +60 (3) 2059 5533

Web: www.bp.com

Key Statistics

Year established: 1964



-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Population by age, 2005

Male Female

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Population by age, 2005:2030 (total)

2030 2005

Country Snapshot: Malaysia Demographic Data

Section 1: Population

Figures in millions. Source: UN Population Division

Table: Demographic Indicators, 2005-2030

2005 2010f 2020f 2030f

Dependent population, % of total 36.9 34.3 32.5 32.2

Dependent population, total, ‘000 9,473 9,526 10,408 11,371

Active population, % of total 63.0 65.6 67.5 67.7

Active population, total, ‘000 16,132 18,175 21,612 23,898

Youth population*, % of total 32.3 29.3 25.3 21.7

Youth population*, total, ‘000 8,291 8,135 8,130 7686

Pensionable population, % of total 4.6 5.0 7.1 10.4

Pensionable population, total, ‘000 1,182 1,391 2,278 3,685

f = forecast. * Youth = under 15. Source: UN Population Division



Table: Rural/Urban Breakdown, 2005-2030

2005 2010f 2020f 2030f

Urban population, % of total 65.1 68.2 78.5 82.2

Rural population, % of total 34.9 31.8 21.5 17.8

Urban population, total, ‘000 16,494 18,781 25130 28994

Rural population, total, ‘000 8,854 8,751 6889 6276

Total population, '000 25,348 27,532 32,019 35,270

f = forecast. Source: UN Population Division

Section 2: Education And Healthcare

Table: Education, 2000-2003

2000/01 2002/03

Gross enrolment, primary 100 93

Gross enrolment, secondary 69 70

Gross enrolment, tertiary 23 29

Adult literacy, male, % 92.0 na

Adult literacy, female, % 85.4 na

Gross enrolment is the number of pupils enrolled in a given level of education regardless of age expressed as a percentage of the population in the theoretical age group for that level of education. na = not available. Source: UNESCO

Table: Vital Statistics, 2005-2030

2005 2010f 2020f 2030f

Life expectancy at birth, males (years) 70.80 71.9 73.8 75.3

Life expectancy at birth, females (years) 75.5 76.5 78.5 80.0

Life expectancy estimated at 2005; f = forecast. Source: UNESCO



Section 3: Labour Market And Spending Power

Table: Employment Indicators, 2001-2006

2001 2002 2003 2004 2005 2006

Employment, '000 9,357 9,543 9,870 9,987 10,045 10,275

– % change y-o-y 0.3 1.9 3.4 1.0 1.0 2.0

– male 6,056 6,142 6,324 6,390 6,471 6,619

– female 3,301 3,401 3,546 3,589 3,575 3,657

— female, % of total 35.2 35.6 35.9 36 36 36

Unemployment, '000 342 344 370 na na na

– male 212 211 236 na na na

– female 130 133 134 na na na

– unemployment rate, % 3.5 3.5 3.6 na na na

na = not available. Source: ILO

Table: Consumer Expenditure, 2000-2012 (US$)

2000 2007e 2008e 2009f 2010f 2012f

Consumer expenditure per capita 1,604 1,574 1,723 1,961 2,260 2,845

Poorest 20%, expenditure per capita 353 346 379 431 497 626

Richest 20%, expenditure per capita 4,356 4,273 4,677 5,323 6,136 7,724

Richest 10%, expenditure per capita 6,161 6,044 6,616 7,529 8,679 10,925

Middle 60%, expenditure per capita 1,104 1,083 1,186 1,350 1,556 1,958

Purchasing power parity

Consumer expenditure per capita 3,647 3,157 3,258 na na na

Poorest 20%, expenditure per capita 802 695 717 na na na

Richest 20%, expenditure per capita 9,900 8,571 8,846 na na na

Richest 10%, expenditure per capita 14,003 12,122 12,512 na na na

Middle 60%, expenditure per capita 2,510 2,173 2,243 na na na

e/f = estimate/forecast. na = not available. Source: World Bank, Country data; BMI



Table: Average Annual Manufacturing Wages, 2000-2012

2000 2007e 2008e 2009f 2010f 2011f 2012f

Local currency 16,656 23,512 24,555 25,736 26,949 28,250 29,594

Wage growth, % y-o-y na 4.0 4.4 4.8 4.7 4.8 4.7

US$ 4,383 6,888 7,673 8,579 9,539 10,463 11,274

e/f = BMI estimate/forecast. na = not available. Source: ILO, BMI



Methodology

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The

precise form of time-series model we use varies from industry to industry, in each case being determined,

as per standard practice, by the prevailing features of the industry data being examined. For example, data

for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries,

there may be pronounced non-linearity, whereby large recessions, for example, may occur more

frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the

use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the

variable’s own history as explanatory information. For example, when forecasting oil prices, we can

include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient

historic data or data quality is poor. In such cases, we use either traditional decomposition methods or

smoothing methods as a basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part of all our industry

forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks,

anomalous data, turning points and seasonal features where a purely mechanical forecasting process

would not.

Chemicals And Petrochemicals Industry

Plant Capacity

The ability of a country to produce basic chemical products depends on domestic plant capacity. The

number and size of ethylene crackers determines both a country’s likely output, and also its relative

efficiency as a producer. We therefore examine:

Stated year-end capacity for key petrochemicals products, mainly ethylene, but also propylene,

polypropylene, polyethylene and so forth. Government, company and third-party sources are used;



Specific company and/or government capacity expansion projects aimed at increasing the number

and/or size of crackers and downstream processing facilities.

Chemicals Supply

A mixture of methods is used to generate supply forecasts, applied as appropriate to each individual

country:

Basic plant capacity and historic utilisation rates. Unless a company imports chemicals products for

domestic re-sale, supply is expected to be governed by production capacity;

Underlying economic growth trends. The chemicals industry is highly cyclical. Strong domestic or

regional demand should be met by increased supply and higher plant utilisation rates;

Third-party projections from national and international industry trade associations.

Chemicals Demand

Various methods are used to generate demand forecasts, applied as appropriate to each individual

country:

Underlying economic growth trends. The chemicals industry is highly cyclical. Strong domestic or

regional demand is expected to require larger volumes of either domestically produced or imported

olefins (ethylene, propylene), polyolefins (PE, PP) or downstream products;

Trends in end-user industries. Strong demand for motor vehicles, construction materials, packaging

products and pharmaceuticals imply rising demand for basic chemicals;

Government/industry projections;

Third-party forecasts from national and international industry trade associations etc.

Cross Checks

Whenever possible, we compare government and/or third party agency projections with the reported

spending and capacity expansion plans of the companies operating in each individual country. Where

there are discrepancies, we use company-specific data, such as physical spending patterns ultimately

determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand

projections to check the chemicals balance of each country. Where the data suggest imports or exports,

we check that necessary capacity exists or that the required investment in infrastructure is taking place.



Business Environment Ratings

BMI’s Petrochemicals Business Environment Rating has three objectives. First, we have defined the risks

rated in order to accurately capture the operational dangers to companies operating in this industry

globally. Second, we have, where possible, identified objective indicators. Finally, we have used BMI’s

proprietary Country Risk Ratings (CRR) in a nuanced manner in order to ensure that only the aspects

most relevant to the industry have been included. Overall, the ratings system – which integrates with

those of all industries covered by BMI – offers an industry-leading insight into the prospects/risks for

companies across the globe.

Conceptually, the ratings system divides into two distinct areas, with the indicators included in each area

stated below:

Limits Of Potential Returns

Evaluation of sector’s size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development.

Risks To Realisation Of Returns

Evaluation of industry-specific dangers and those emanating from the state’s political/economic profile

that call into question the likelihood of anticipated returns being realised over the assessed time period.

Indicators

The following indicators have been used. Overall, the rating uses three subjectively measured indicators,

and 41separate indicators/datasets.

Table: Petrochemicals Business Environment Indicators And Rationale

Limits to potential returns Rationale

Market structure

Cracker capacity, current year Objective measure of sector size

Cracker capacity, 2011 Forecast of sector development

Downstream capacity, current year Objective measure of domestic demand

Country structure

Financial infrastructure

Rating from BMI’s Country Risk Rating (CRR) to denote ease of obtaining investment finance. Poor availability of finance will hinder company operations

across the economy

Trade bureaucracy Rating from CRR. Low trade restrictions are essential for this export-based

industry

Physical infrastructure Rating from CRR. Given size of manufacturing units, sector development

requires strong supporting power/water/transport infrastructure



Risks to potential returns

Market risk

Industry regulatory environment Subjective evaluation against BMI-defined criteria. This indicator evaluates

predictability of operating environment

Country risk

Structure of economy

Rating from CRR, to denote health of underlying economic structure, including 7 indicators such as volatility of growth; reliance on commodity imports,

reliance on single sector for exports

Long-term external economic risk Rating from CRR, to denote vulnerability to external shock – principal cause of

economic crises

Long-term external financial risk Rating from CRR, to denote vulnerability of currency/stability of financial sector

Institutions Subjective rating from CRR, to denote strength of bureaucracy and legal

framework. Also evaluates level of corruption

Long-term political risk Rating from CRR, to denote strength of political environment

Source: BMI

Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-

components equal weight. Consequently, the following weight has been adopted.

Table: Weighting Of Indicators

Component Weighting

Limits of potential returns 70%, of which

Petrochemicals market 65%

Country structure 35%

Risks to realisation of returns 30%, of which

Market risk 30%

Country risk 70%

Source: BMI

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