State-Oriented Rare Earth Expansion

A Proposed Solution for Downstream Industries in Malaysia

By Arveent Kathirtchelvan

Now that the Lynas Advanced Materials Plant (LAMP) saga seems to be settling down, Malaysia should start focusing on how to take advantage of it to maximise the potential of rare-earth related industries to thrust the economy. This can be done in multiple ways, from the government buying a stake in the LAMP to simply enticing companies from overseas to set-up their businesses in Malaysia. Liberasi would like to suggest another model, whereby a joint venture is set up between Lynas and the government (either directly or through one of our GLCs or GLICs) to control local distribution of Lynas products. This entity can be utilized to partner with manufacturers to produce rare-earth products. For the sake of argument, let’s call this company Rare-Earth Co. (RECo).

This seems like a complicated arrangement, however its advantages, we believe, justify exploration. Firstly, the rare-earth industry, with respect to the downstream, does not exist in Malaysia in much significance. This may lead to companies entering Malaysia as pioneers and demanding unfairly excessive incentives which may take much of the advantages of the industry in question away from Malaysians. Having the state involved can help drive decisions that may not be the most advantageous for a purely profit-oriented entity.

For example, a big selling point for Malaysia in attracting these investments is usually cheap labour, which then leads to depressed wages and an inability of the workforce to afford a higher-quality standard of living. State-control can help increase wages as a policy directive, which may affect the profits of an enterprise but is better overall for Malaysians. In fact, a huge stumbling block for increasing the national minimum wage has been the fear that companies will leave to other countries within Asean to take advantage of lower wages there. Insulating industries from these shocks can help keep them here and concurrently scale up of wages as well.

State control of rare earths may also help drive varied research and development activities that may not be explored extensively for a purely profit-driven enterprise. Products that may be in competition with those currently offered may be produced and expanded whereas private hands may suppress it to ensure current profits are unaffected. Moreover, these IPs can be used to generate state income through exports and sales to the private sector, whether local or foreign, which will not be the case when bringing in foreign Multi-National Corporations (MNCs). Increased economic strength of the state can help drive improvements in terms of social development and welfare schemes to benefit the rakyat.

However, a question to ask is how would this model be competitive against a purely market-driven, private-private partnership, either through joint ventures or customer-vendor relationships? For this, we may look to China. Through programs 863 and 973, the Chinese government focused on advancing the country forward strategically, economically and technologically through state-funded research and development of knowledge to propel the rare-earth industry. Alongside this, the government also encouraged local companies to partner with overseas firms, from which new technologies were developed through a state-driven approach. This aggressive approach is how China builds new capacity for their technologies quickly.

What we can take away from this approach is the state can provide the right environment for the rapid development of the rare-earth industry. Firstly, putting forth advantageous financing options can increase the interest of foreign corporations to partner with RECo to develop their products. The best financier has always been the state, especially in ventures with strategic value to it. With this in mind, investment in building factories, buying equipment and establishing research centres can be offered by the state as perks of foreign companies partnering with RECo. In addition to this, cheaper land, revised tariff rates, stamp duty exemption, lower interest rates, granting pioneer status, easier regulatory checks and greater marketing potential can be explored as well.

Whatever company arising from RECo joint ventures then will be under the control of the state, opening income streams and opportunities to develop local innovations. Geopolitically speaking, rare-earth industries are currently highly dependent on China, which holds a near-monopoly at 84% market share. This means, if China decides on shifting policies to exert geopolitical control onto the global economy, most countries would have to abide by China’s terms, at least for the short term.

In response to this, other countries are looking to develop their own rare-earth supply chain. However, there are specific vulnerabilities in the market that might make this challenging. For example, the Chinese influence in the market, especially with undercutting of prices, makes other suppliers less viable to customers, effectively killing them off. To overcome this, there needs to a policy-driven approach confined to a geographical region to accelerate the growth of the local industries to be competitive with China.

All of this, however, will take time to establish and run well, with costs needing to be artificially brought down by price-control mechanisms or shouldered entirely by end-users, but either of these can cause associated problems. Costs of products using rare-earths, from wind turbines to several electronic equipment, would skyrocket, more so with the higher labour costs in developed nations. Moreover, the neoliberal status quo of most countries alongside lobbying against the rare-earth industry would potentially dampen growth as well.

Malaysia is special amongst countries outside of China in the area of rare-earth elements due to the presence of the LAMP. The infrastructure for the midstream is already operational and the upstream supply to this is secure with the Mt. Weld deposit rich enough for more than 25 years of production. Not only this, the products are already competitive in the open market even with the presence of China due to the richness of the Mt Weld deposit and have established customers as well. The addition of a state-backed investment into the downstream for Malaysia is, thus, shielded from many of the challenges faced elsewhere.

With this in mind, vertical integration of the supply chain is another step in the development of the rare-earth industry the state can be involved in. This means the upstream, midstream and downstream industries are interconnected with each other in one cohesive stream. No industry related to rare-earths, then, have to compete for either suppliers or customers. At the moment, the midstream can be taken care of through the LAMP and the upstream can be relied on Mt. Weld. After the downstream has been established, local up and midstream can be focused on. However, further reliance on overseas investors for the downstream will only make Malaysia a placeholder nation where capital is generated just to be siphoned to large corporations.

Liberasi finds the role of the state imperative to ensure proper development of the rare-earth industry with respect to the downstream. From this, future developments can expand on local rare earth upstream mining and establishment of local midstream processing plant, as envisioned in our Proactive Reindustrialisation series, Part 2, which we will continue to develop.