Market Watch 2011 The Petrochemical Sector in Malaysia

Market Watch 2011 The Petrochemical Sector in Malaysia General information about Malaysia Malaysia is centrally located within the ASEAN and consists of the Malaysian Peninsula and the States of Sabah and Sarawak on the island of Borneo. The former British colony gained its independence in 1957 and is a Parliamentary democracy with constitutional monarch since. Malaysia has a tropical climate and is with a total area of 330.000 km 2 slightly smaller than Germany. Due to its bio-diverse range of flora and fauna, Malaysia is one of the 17 megadiverse countries. Malaysia is a multi-ethnic, multicultural and multilingual society with 28.31 million inhabitants. Malays make up the majority of the population at 50.4% followed by Chinese 23.7%, Indian 7.1% and other local Malays 11%. The Malaysian constitution guarantees freedom of religion, although Islam is the largest and official religion. Approximately 60.4% of the population practiced Islam, 19.2% Buddhism, 9.1% Christianity, 6.3% Hinduism, and 2.6% practice Confucianism and other traditional Chinese religions. The official language of Malaysia is known as Bahasa Malaysia but English as well as Chinese are the business languages. Economical Overview Malaysia is a dynamic country constantly on the move. From a country dependent on agriculture and primary commodities decades ago, Malaysia has now become an exportdriven economy spurred on by high technology, knowledge-based and capital-intensive industries. Malaysia is one of the 20 largest trading nations worldwide and is ranked 30 th out of 125 countries by the Global Enabling Trade Report 2010, published by the World Economic Forum as well as the 21 th largest exporter among the trading nations worldwide. The country is strategically located in the heart of South East Asia and offers a costcompetitive location for investors intending to set up offshore operations for the manufacture of advanced technological products for both regional and international markets. In addition, the Malaysian economy is supported by a market-oriented economy 1

and pro-business government policies. The new Economic Transformation Programme (ETP) by the PEMANDU, the Performance Management & Delivery Unit of the Government from Malaysia, has been presented to the public. The ETP is anchored on 12 National Key Economic Areas (NKEAs), which are drivers of economic activities that have the potential to materially contribute to the growth of Malaysia. ETP is developed under the patronage of the Prime Minister, the objective also known as Vision 2020 to transform Malaysia into a high income country until the year 2020 is to be achieved. Therefore, it is planned to increase the Gross National Income (GNI) per capita to US$ 15,000.00 or RM 48,000.00. To reach this, an annual growth of the GNI of 6 % is necessary. Within the programme, it is planned to reach a growth of the service sector from 58 to 65 % and to create 3.3 million new jobs. Economical Key facts Malaysia 1 Currency: 1 Ringgit (RM) = 100 Sen Exchange rates: 1 EURO = 4.2 RM; 1 US$ = 3.1 RM (14.12.2010) GDP (billion RM): 2007: 639.8; 2008; 738.7; 2009: 674.4 GDP - real growth rate: 2009: -1.7%; 2010: 4.5-5.5% Inflation rate : 2-2.4 %(2010) Exports: $157.2 billion (2009) Exports - commodities: electronic 36.5%, petroleum and products 8.3%,Chemical products 6.6%, natural gas 6.4%, fats & oils 6.4%, electrical engineering 4.6%, machinery 3.5% Exports - partners 2009: Singapore 14.0%, China 12.2%, US 11.0%, Japan 9.8%, Thailand 5.4%, Hong Kong 5.2%, Germany: 2.7% Imports: $119.3 billion Imports - commodities: electronics 29.4%, chemical products 9.1%, machinery 8.9%, electrical engineering: 7.2%, petroleum and products 7.0%, food and living animals: 6.2%, iron and steel 3.6%, raw 1 Source: Germany Trade & Invest - 2 -

materials: 3.4% Imports - partners: China 14.0%, Japan 12.5%, USA 11.2%, Singapore 11.0%, Thailand 6.1%, Germany: 4.2% Unemployment rate: 3.7% (2009) Average wage 2008: Middle management: 6.805RM, senior clerk: 2.650RM, skilled worker: 1.845RM, consultant: 1.450RM, unskilled workers: 910RM Population below poverty line: 5.1% Bilateral Trade: Malaysia & Germany Despite ruled by the British historically, Malaysians still highly value and appreciate Made in Germany products. In 2010, Germany remained Malaysia s largest trading partner within the EU and was ranked Malaysia s 9 th largest trading partner. Malaysia s total trade with Germany recorded a decrease of 22 per cent in 2009, valued at US$ 5.2 billion compared to US$ 6.7 billion in 2008. Exports to Germany amounted to EURO 3,996.4 million in 2009, while imports were valued at EURO 3,234.4 million. Among ASEAN countries, Malaysia was Germany s largest trading partner and source of imports. Overview of the Petrochemical Industry A wide range of petrochemicals are produced in Malaysia, such as olefins, polyolefins, aromatics, ethylene oxides, glycols, oxo-alcohols, exthoxylates, acrylic acids, phthalic anhydride, acetic acid, styrene monomer, polystyrene, ethylbenzene, vinyl chloride monomer and polyvinyl chloride. In 2008 the Petrochemical Industry is one of the leading industrial sectors with total investments of RM 58 billion. Overall, Malaysian investments in the industry amounted to RM 37.8 billion (65%) in 2009, with PETRONAS being the major investor. The largest source of foreign investments in the petrochemical industry is the USA (33%), followed by Germany (22.8%) and Japan (14%). The rapid growth of the industry is mainly attributed to the availability of oil and gas as feedstock, a well-developed infrastructure, a strong base of supporting services, and the country's cost competitiveness, as well as Malaysia's - 3 -

strategic location within ASEAN and its close proximity to major markets in the Far East. The long term reliability and security of gas supply ensures the sustainable development of the country's petrochemical industry. According to the Malaysian Industrial Development Authority (MIDA) reports, Malaysia holds the world's 23 rd largest crude oil reserves and the world s 14 th largest natural gas reserves with a capacity of 84.1 trillion cubic feet in 2009. According to BP s Statistical Review of World Energy 2009, at the end of 2009 Malaysia had oil reserves of 5.5bn barrels and 2.38 trn cu metres of natural gas. In 2008 691,600 barrels of crude oil have been produced. Malaysia also possesses the world's largest production facility at a single location of liquefied natural gas with production capacity of 23 million metric tonnes per year. The petroleum sub sector includes refinery products such as naphtha, liquefied petroleum gas, gasoline, kerosene, diesel, fuel oils, gas oils, wax, bitumen and lubricating oils. Presently, six refineries and a gas-to-liquid plant are in operation. Companies producing various types of lubricating oils total more than 20 currently. Domestic demand for lubricants is approximately 300,000 metric tonnes per annum (mtpa), which is mainly met by PETRONAS, Shell and BP with 70%. Total investments in the refineries amount to RM 1.1 billion, of which 63% are from domestic and 37% from foreign sources. All in all 42 companies, with a total capacity of 12.9 million mtpa are in the production of petrochemicals, which got investments to the amount of RM32.3 billion in 2009. The main domestic investor in the petrochemical sector is PETRONAS. Besides PETRONAS, the presence of petroleum giant players such as Shell and ExxonMobil for over 100 years demonstrates their long-term confidence in Malaysia s oil and gas industry. Through efforts provided by the government and Petroliam Nasional Berhad (PETRONAS), Malaysia has attracted investors and major industry players such as Dow Chemical, ConocoPhilips, Kaneka, Polyplastic, Toray, Dairen, Mitsui, BP, BASF, Idemitsu, Titan, Thirumalai and Eastman Chemicals. The United States is the largest source of investment in Malaysia s petrochemical sector followed by Japan, the United Kingdom, Germany and Taiwan. Malaysia has forged partnership with other ASEAN members: Vietnam, Indonesia and the Malaysia-Thailand Joint Development Area (JDA) for the supply of gas. In efforts to further - 4 -

enhance gas supply is made with the availability of the ASEAN gas grid, a venture that is made available to all 10 ASEAN countries. Feedstock at competitive prices have made Malaysia a viable petrochemical hub in the ASEAN region attracting more than US$ 9 billion in investments from leading petrochemical and chemical manufacturers. The six gas processing plants located in Kertih, Terrengganu ensures the industry sufficient supply of petrochemical feedstocks while Malaysia s Peninsular Gas Utilisation (PGU) transpeninsular gas transmission pipeline channels gas to industries around the country. The following exhibit shows the locations of Oil Refineries in Malaysia. Exhibit 1: Location of Oil Refineries in Malaysia Oil Refineries Petronas Penapisan (Terengganu) Sdn Bhd Petronas Penapisan (Melaka) Sdn Bhd Malaysia Refining Company Sdn Bhd Shell Refining Company (FOM) Bhd Esso (Malaysia) Bhd Location Kerteh, Terengganu Tangga Batu, Melaka Tangga Batu, Melaka Port Dickson, Negeri Sembilan Port Dickson, Negeri Sembilan Source: Malaysian Industrial Development Authority (MIDA) Incentives for Growth The corporate tax rate has been reduced to 25% and a wide range of tax incentives apply to both local- and foreign-owned companies in Malaysia. 2 To ensure companies in Malaysia maintain their competitive edge, the government constantly reviews these incentives. Among the incentives include the following: 1) Incentives for Manufacturing Companies a. Pioneer Status: Applications received by 31 December 2010 are eligible for an income tax exemption of 70% or 100% on the statutory income for five years or b. Investment Tax Allowance: Investment tax allowance of 60% or 100% on the qualifying capital expenditure for five years. The allowance can be utilised to offset against 70% or 100% of the statutory income. c. Reinvestment Allowance: Reinvestment allowance of 60% for 15 years 2 http://www.mida.gov.my/en_v2/index.php?page=taxation - 5 -

on the qualifying capital expenditure. The allowance can be offset against 70% or 100% of the statutory income. d. Accelerated Capital Allowance: An accelerated capital allowance consisting of an initial allowance of 40% and an annual allowance of 20% is available for three years after the reinvestment allowance period. 2) Incentives for High Technology Companies a. Pioneer Status with a tax exemption of 100% on the statutory income for five years; or b. Investment Tax Allowance of 60% on the qualifying capital expenditure for five years which can be offset against 100% of the statutory income. 3) Incentives for Strategic Projects a. Pioneer Status with a tax exemption of 100% on the statutory income for ten years; or b. Investment Tax Allowance of 100% on the qualifying capital expenditure for five years which can be offset against 100% of the statutory income. 4) Pre-packaged Incentives a. Customized packages that cover tax and non-tax incentives. 5) Incentives to Strengthen Industrial Linkages 6) Incentives for R&D 7) General Incentives a. Industrial Building Allowance b. Infrastructure Allowance c. Tariff Related Incentives All applications for the incentives mentioned above, should be submitted to MIDA. 3 The World-class Facilities in Petrochemical Zones To sustain the competitiveness of the Malaysian petrochemical industry, value integration through inter-plant synergies is promoted. The development of petrochemical zones where petrochemical plants are clustered together has created a value chain, which ensures the progressive development of downstream petrochemicals activities. The major petrochemical zones with 29 petrochemical plants are in: 3 Source: MALAYSIA INVESTMENTINTHE MANUFACTURINGSECTOR; p. 15-19 / MIDA 2009Policies, Incentives and Facilities - 6 -

Kertih, Terengganu Gebeng, Pahang Pasir Gudang Tanjung Langsat, Johor Bintulu, Sarawak Each zone is an integrated complex with crackers, syngas and aromatics facilities to produce basic feedstocks for downstream products. Kertih in Terengganu has now transformed into a petrochemical hub. It houses the Petronas Petrochemical Integrated Complex (PPIC) that links the entire range of the oil and gas value chain beginning from upstream exploration and production to the final stage of petrochemical manufacturing. Gebeng in Pahang is another petrochemical hub for multinational players like BASF, Amoco, Kaneka, Eastman and Polyplastics. The petrochemical zone provides an integrated environment that meets the specific needs of the petrochemical industry. Pasir Gudang in Tanjung Langsat, located next to the port of Johor is an established industrial area. To cope with the needs of the growing petrochemical industry, the adjacent Tanjung Langsat site has been developed to enhance manufacturing capacity. Bintulu in Sarawak is the largest producer of liquefied natural gas (LNG) in Malaysia. There are three LNG plants with a combined capacity of 24 million tons a year. Furthermore is has an ammonia/urea fertilizer plant. The following products are manufactured in petrochemical plants in the petrochemical zones described above. Exhibit 2: Manufactured Products Paraxylene, Benzene Ammonia Acetic Acid Ethylene Ethoxylates Propylene Ethanolamines Acrylic Acid Polyester Copolymers Purified Terephthalic Acid Dispersion Polyvinyl Chloride Methyl Methacrylates Copolymers MTBE Polyacetals - 7 -

Ethylene Oxide Polyethylene & Low Density Polyethylene Vinyl Chloride Monomer Ammonia, Urea Liquefied Natural Gas Glycol Ethers Butanol Middle Distillates Esters Syngas Oxo-alcohols Phthalic Anhydride Polyvinyl Choride Ethylene Glycol Plasticizers Butanediol Tetrahydrofurane BTX Butyl Acetate Polypropylene Polystyrene Ethylbenzene, Styrene Monomer Expandable Polystyrene Ethylene Vinyl Acetate Gamma-butyrolactone Source: Malaysian Industrial Development Authority (MIDA) In addition, there are also petrochemical plants located in other parts of Malaysia such as the ammonia/urea plants in Gurun, Kedah and Bintulu, Sarawak, the acrylonitrile butadiene styrene (ABS) plant in Penang, the methanol plant in Labuan and the nitrilebutadiene rubber (NBR) plant in Kluang and Pasir Gudang, Johor. Projects Approved in 2009 In 2009, a total of 8 projects were approved with total investments of RM1.2 billion compared with 17 projects with total investments of 13.8 billion in 2007. Four of the Projects were new projects with investments of RM1.16 billion while four projects were expansions/diversification projects (RM13.3 million). 61 % (RM719.1 million) were domestic investments; respectively 39% (RM460.1 million) were foreign investments. 174 employment opportunities are expected to be generated with regards to the approved projects, including chemical engineering, process engineering and skilled workers. Among the Major Projects Approved were: A new Malaysian majority joint-venture project involving investments of RM1.1 billion to produce petrochemical feedstocks and fuels. The products approved in 2009 reflect Malaysia s efforts in targeting investments in projects to provide additional petrochemical feedstocks as outlined in the IMP3. - 8 -

The existing production of olefin feedstocks is currently fully committed to existing petrochemical projects. Hence, it is essential that new sources of feedstock are made available to continue to develop the petrochemical industry in Malaysia. There is need to establish new crackers in order to provide additional feedstocks, which will provide a base for enlarging the range of petrochemical products produced in Malaysia. Imports According to the Ministry of International Trade and Industry Malaysia, Malaysia remains a net importer of petrochemicals. Petrochemicals that are imported are used as raw materials in the manufacture of various products by different industries, which are subsequently exported as intermediates or consumer goods. Imports of petroleum products declined to RM30.3 billion in 2009 from RM44 billion in 2008. Also imports of refined petroleum products declined by 40.8% to RM15.3 billion in 2009 from RM25.8 billion in 2008. Major sources of imports were Singapore with imports valued at RM11.5 billion, which is 75.1% of total imports, followed by Indonesia (RM756.8 million) and Saudi Arabia (RM746.9 million). Imports of plastic in primary forms (synthetic resins) totaled RM8.3 billion in 2009, registering a decline of 17.6% from RM10.4 billion in 2008. Malaysia s major imports were Singapore with RM2.4 billion, followed by Japan (RM1.2 billion) and Thailand (RM715.3 million). Imports of plastic products, mainly containers, plates, sheets, films and articles of plastic, totaled RM5 billion in 2009 compared to RM5.6 billion in 2008, a reduction of 10.7%. Major sources of imports were Japan (RM1 billion), PRC (RM747.9 million), Singapore (RM731 million) and the USA (RM612.7 million) Exports According to the report from the Ministry of International Trade and Industry Malaysia 2009, exports of petroleum products including petrochemicals and plastic products amounted only to RM72.5 billion in 2009, compared with RM96.1 billion in 2008. Exports of petroleum and petroleum related products including liquefied natural gas (LNG) and refined petroleum declined by 27% amounting to RM56 billion in 2009 from RM76.8 billion - 9 -

in 2008. Their major export destinations were the Republic of Korea (ROK) totaling RM735 million, followed by India (RM486.9 million), Japan (RM435.8 million) and Singapore (RM261.5 million). Exports of plastics in primary form (synthetic resins) comprising polymer of ethylene and styrene, polyacetals and polycarbonates as well as waste, parings and scrap declined by 15.7 % to RM8.2 billion in 2009 from RM9.9 billion in 2008. Major destinations were the PRC with exports valued at RM2 billion, followed by Indonesia (RM894.8 million), Thailand (RM544.8 million) and Singapore (RM476.4 million). The demand for plastic products especially in food-packaging sub-sector registered an increase in the second quarter of 2009. The overall exports however declined by 10.8%, decreasing to RM8.3 billion in 2009 from RM9.3 billion in 2008 as a result of lower demand in the major markets or the European Union (EU) and Japan. Exports from the plastics industry comprised of plastic bags, bottles and containers, films and sheets. Major export markets were Singapore with exports totaling to RM1.6 billion, Japan (RM997.1 million) and the UK (RM570 million). Exports of LNG were mainly to Japan with a value of RM19.9 billion, followed by the ROK (RM7.3 billion) and Chinese Taipei (RM3.2 billion). Outlook The global economy is projected to sustain its growth and export momentum despite the anticipated slowdown of the US economy. This is expected to benefit the Malaysian manufacturing sector assisted by the promising investment trends particularly in industries such as E&E, M&E, chemicals, basic metals and petroleum industries. The machinery and equipment (M&E) industry has progressed to manufacture high-end specific M&E, automation equipment, materials handling equipment, and heavy M&E that support the E&E, automotive and petrochemical, oil and gas, construction and power generation industries. Growth in the petrochemical sector will be driven mainly by the developments in the petroleum and related industry. The rise in the price of crude oil will continue to impact the industry in 2011. The development of the petrochemical industry in Malaysia is also dependent on additional supply of feedstocks. - 10 -

Industrial Master Plan 3 (IMP3) Malaysia will continue to fine-tune its policies and incentives to ensure that it remains a competitive location for both manufacturing and services activities. The strategic thrusts for the petrochemical sector in the IMP3 are as follows: Expanding and enhancing the value-added of existing capacities and broadening the range of petrochemicals produced Diversifying into manufacturing related services and support industries; Enhancing linkages with downstream industries, in particular plastics and oleo chemicals Intensifying the development of technologies in materials and product applications Improving chemical process technologies and the application of catalysts to increase yields Undertaking the full integration of existing petrochemical zones in Kertih, Terengganu; Gebeng, Pahang; and Pasir Gudang-Tanjung Langsat, Johor Establishing new petrochemical zones in Bintulu, Sarawak; Gurun, Kedah; Tanjung Pelepas, Johor; and Labuan; Making feedstocks available at competitive prices Conclusion With the full implementation of AFTA, petrochemical manufacturers in Malaysia will benefit from a single market with a total population of 580 million, a combined GDP of US$ 1.07 trillion and a total trade of US$ 1.34 trillion. Manufacturers based in Malaysia will also benefit from the access to a much larger Asia Pacific market. With China being a net importer of petrochemicals and its entry into the WTO will also open up new business opportunities for petrochemical manufacturers in Malaysia. Malaysia has the infrastructure and system in place for petrochemical manufacturers to compete favorably with regional players. The Malaysian government will implement measures to further enhance the business environment, infrastructure development, human resources support and the position of feedstock supply, in which all appear to be contributing factors for a stable and conducive investment environment for the future development of Malaysia s petrochemical industry. - 11 -

Trade Fairs in Malaysia 2011 & 2012 OGA 2011 13 th Asian Oil, Gas & Petrochemical Engineering Exhibition 01 to 03 June 2011 Kuala Lumpur Convention Centre World Gas Conference & Exhibition 2012 04 to 08 June 2012 Kuala Lumpur Convention Centre (KLCC) Contact: Mr. Thomas Brandt: thomas.brandt@malaysia.ahk.de Ms. Schvonne Choo: schvonne.choo@malaysia.ahk.de We hope the market report servess you with actual information on the Malaysian market. Our core business is to establish contacts, finding distribution partners, project acquisitions, etc. Our Office-In-Office Concept and our Firmenpool Malaysia will give you a permanent address to develop the market. Please contact us for further information.