Malaysia Petro

2010
www.businessmonitor.com
malaYsia
petrochemicals Report
INCLUDES 5-YEAR FORECASTS TO 2014
ISSN 1749-2335
Published by Business Monitor International Ltd.
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
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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
Ethylene Capacities By Region
tonnes per annum (tpa) in 2008, with 2009 Estimate
Asia Pacific representing 32.7% of Asia-
Western
Pacific
installed capacity (China contributed Europe
(excl.
15%
29% of Asian capacity) and North China) Eastern
23% Europe
America 25.6%.
5%
China Middle East

Although the Middle East and Africa are 10% and Africa
the largest source of oil and gas, the South
17%
region contributed just 17.1% of total America

4% NAFTA
capacity. This is set to change over the 26%
medium to long term as new capacity

Source: BMI
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

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
Ethylene Capacities By Region
cost of petrochemicals plant construction, 2014 Forecast
which had accelerated rapidly from 2002 Asia- Western
to 2008 amid a construction boom in the Pacific Europe
(excl. 11% Eastern
Gulf region. A scarcity of raw materials, China) Europe
labour and engineering expertise has 25% 5%
plagued the Gulf petrochemicals

industry, leading to project schedule Middle East
China
and Africa
slippages. Some olefins complexes have 12%
23%
seen costs increasing by nearly four-fold South
America NAFTA
from 2002. A downturn in construction 5% 19%
has freed up resources and given the
Source: BMI
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

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
Global PE Capacities By Product
resulting impact on the economy.
2009 Estimate
Polymer prices have plummeted as
demand has diminished, purchasers
withdrew from the market and producers HDPE
33%
de-stocked throughout the value chain. LLDPE
41%
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.
LDPE
26%
Polyvinyl Chloride
Source: BMI
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.

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
Ethanolamines, ethoxylates, glycol ethers, butanol, butyl

Optimal Chemical (Malaysia) 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
Acrylic acid and esters, syngas, butyl acrylate, oxo-alcohols,

phthalic anhydride and plasticizers, butanediol,
BASF Petronas Chemical (Malaysia) 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
Petrochemicals Country Market Country Petrochemi

Country market structure Limits risks risk Risks cals 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

1
Nominal GDP, MYRbn 641.9 698.3 686.6 724.8 781.7 842.9 906.0 963.6
1
Nominal GDP, US$bn 187.90 206.76 196.17 210.09 235.09 263.39 297.06 326.66
Real GDP growth, %

1
change y-o-y 6.2 4.6 -3.4 2.7 4.5 4.8 4.6 4.5
1
GDP per capita, US$ 7,071 7,650 7,140 7,525 8,291 9,149 10,169 11,023
2
Population, mn 26.6 27.0 27.5 27.9 28.4 28.8 29.2 29.6
Industrial production
1
index, % y-o-y, average 2.3 3.1 -1.8 2.0 3.5 4.5 4.7 4.7
Unemployment, % of
labour force, end of
2
period 3.2 3.3 4.8 4.4 3.7 3.7 3.7 3.8
1 2
f = BMI forecast. Source: Bank Negara Malaysia, BMI; OEF

Company Monitor
Petronas
Malaysia’s state-owned Petronas is an integrated company, and the Address
nation’s second-largest producer of oil and gas. The group’s assets Petronas - Petroliam Nasional
include two refineries in Malaysia with a combined capacity of Bhd
Tower 1, Petronas Twin Towers
303,500b/d. Its petrochemicals plants are located at Kerteh and Kuala Lumpur City Centre
Gebeng on the eastern corridor of peninsular Malaysia, where 50088 Kuala Lumpur
Petronas is actively pursuing the development of fully integrated
Malaysia
petrochemicals complexes with common infrastructural facilities. The

Tel: +60 (3) 20515000
player’s petrochemicals products are marketed via wholly owned

Fax: +60 (3) 2026 5050
subsidiary Malaysian International Trading Corporation (MITCO).

Web: www.petronas.com.my
Petronas has embarked on large-scale petrochemicals projects with

Key Statistics
multinational JV partners at its Kerteh and Gebeng complexes. The
Group net profit (year ended
Kerteh complex includes: a 400,000tpa ethylene plant that is a JV March 31 2008):
between Petronas, Idemitsu Petrochemicals and BP; a 200,000tpa MYR61bn (US$18.1bn)
HDPE/LLDPE plant; a 50,000tpa pipe compounding plant with BP No. of employees: 30,000
Chemicals; a 400,000tpa VCM plant and a 150,000tpa PVC plant co- Year established: 1974
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.

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 Address

operations in Thailand and the US) and Malaysia-based Permodalan Titan Chemicals Corp. Bhd
6/F, Bangunan Malaysia Re
Nasional Berhad (PNB). It was listed on the Main Board of Bursa, 17, Jalan Dungun
Malaysia on June 23 2005. Titan built Malaysia’s first and largest Damansara Heights
integrated petrochemicals complex. The company presently owns the 50490 Kuala Lumpur
Malaysia
largest integrated polyolefins production capacity in South East Asia.
Tel: +60 (3) 2093 4222
It is also the first Malaysian company to produce olefins and
Fax: +60 (3) 2093 5688
polyolefins. The Chao group also wholly owns US chemicals firm,
Web: www.titangroup.com
Westlake, and has a range of chemical interests in Taiwan and China.
Key Statistics
The company recorded a dominant 38% share in the Malaysian
Pre-tax profit (year ended March
polyolefins sales volume in 2007 and noted a 30% share in the 31 2008): US$28.36bn
Indonesian combined LLDPE and HDPE markets. No. of employees: 1,005
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

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 Address

printing inks joint venture. BASF (Malaysia) has operating companies BASF (Malaysia) Sdn Bhd - Head
Office
and JVs, including plants, in the states of Selangor, Johore and No. 2, Jalan U8/87
Penang. Its polyurethane system company, feed vitamin premix plant Seksyen U8, Bukit Jelutong
and masterbatch business are all located within the Klang Valley. At Shah Alam
40706 Selangor
Pasir Gudang, Johore, it has a Styropor plant, a Tamol plant and an Malaysia
engineering plastics compounding plant. In conjunction with Petronas, Tel: +60 (3) 5628 3888
it operates 20,000tpa of glacial acrylic acid capacity, 160,000tpa of Fax: +60 (3) 5628 3777
crude acetic acid capacity, 100,000tpa of butyl acrylate capacity, Web: www.basf.com.sg
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.

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 Address

segments. It has interests in two plants at the Kerteh complex. The BP Malaysia Sdn Bhd
35/F, Menara Mascis
Kerteh acetic acid plant is a JV between BP and Petronas. The site Kuala Lumpur City Centre
uses BP’s proprietary Cativa catalyst process technology in the 50088 Kuala Lumpur
continuous carbonylation of methanol to produce about 500,000tpa of Malaysia
acetic acid. Petronas operates a PE plant that uses BP’s Innovene Tel: +60 (3) 2059 5555
technology under licence to produce LLDPE and HDPE for the local Fax: +60 (3) 2059 5533
markets. BP also operates a wholly owned 600,000tpa PTA plant at Web: www.bp.com
Gebeng.
Key Statistics
Year established: 1964

Country Snapshot: Malaysia Demographic Data

Section 1: Population
Population by age, 2005 Population by age, 2005:2030 (total)

75+ 75+
70-74 70-74
65-69 65-69
60-64 60-64
55-59 55-59
50-54 50-54
45-49 45-49
40-44 40-44
35-39 35-39
30-34 30-34
25-29 25-29
20-24 20-24
15-19 15-19
10-14 10-14
5-9 5-9
0-4 0-4
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Male Female 2030 2005
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
Rating from BMI’s Country Risk Rating (CRR) to denote ease of obtaining
investment finance. Poor availability of finance will hinder company operations
Financial infrastructure across the economy
Rating from CRR. Low trade restrictions are essential for this export-based
Trade bureaucracy industry
Rating from CRR. Given size of manufacturing units, sector development

Physical infrastructure requires strong supporting power/water/transport infrastructure

Risks to potential returns
Market risk
Subjective evaluation against BMI-defined criteria. This indicator evaluates

Industry regulatory environment predictability of operating environment
Country risk
Rating from CRR, to denote health of underlying economic structure, including

7 indicators such as volatility of growth; reliance on commodity imports,
Structure of economy reliance on single sector for exports
Rating from CRR, to denote vulnerability to external shock – principal cause of

Long-term external economic risk economic crises
Long-term external financial risk Rating from CRR, to denote vulnerability of currency/stability of financial sector
Subjective rating from CRR, to denote strength of bureaucracy and legal

Institutions 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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Malaysia Petro

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2010

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: December 2009

Business Monitor International © 2009 Business Monitor International.

© Business Monitor International Ltd Page 2

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

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

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

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

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

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

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

© Business Monitor International Ltd Page 3

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

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

© Business Monitor International Ltd Page 4

© Business Monitor International Ltd Page 5

© Business Monitor International Ltd Page 6

Malaysia Petrochemicals Industry SWOT

Strengths  Rich oil and gas reserves

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

© Business Monitor International Ltd Page 7

Malaysia Political SWOT

Strengths  Malaysia is a successful example of a democratic Islamic state. Despite murmurs of

© Business Monitor International Ltd Page 8

Malaysia Economic SWOT

Malaysia Economic SWOT Analysis

© Business Monitor International Ltd Page 9

Global Market Overview

Country 2009e 2014f

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

© Business Monitor International Ltd Page 10

Country 2009e 2014f

Venezuela 600 1,900

Strengths Rich oil and gas reserves

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

Strengths Malaysia is a successful example of a democratic Islamic state. Despite murmurs of