“Market Watch 2010”

The Petrochemical Sector in Malaysia

General Overview of the Malaysian Market

With an annual average of 20% export surplus, Malaysia is one of the 20 largest export
nations worldwide and is ranked 28th out of 121 countries by the “Global Enabling Trade
Report 2009”, published by the World Economic Forum. Malaysia’s total trade in 2008
amounted to RM 1,185 trillion, which depicts an increase of 6,8% compared to 2007 trade
balance; exports even rose 9,6%, while total imports grew by 4.9% to RM 504.57 billion.
But the weak global markets also affected Malaysian trade in 2009. In the first 6 months of
2009, total trade accounted for RM 441.75 billions, decreasing of about 30% in comparison
to the first half of 2008. The estimated exports of 2009(January-August) are RM347.1
billion; total imports amounting RM270.5 billion.1Major export countries for Malaysian
goods are Singapore, Japan, China, India, Korea as well as the United States, Australia,
the Netherlands and Germany among others. In 2008, Malaysia’s largest export revenue
contribution was made by the electrical and electronics products sector (38%). Other
crucial sectors are palm oil & palm oil-based products, crude petroleum, liquefied natural
gas and timber/timber-based products. Major import products are electrical/ electronic
products, machinery, iron / steel products as well as chemical products.

Malaysia’s top five trading partners were the United States of America, the Republic of
Singapore, the European Union, the People’s Republic of China and Japan. Malaysian FDI
reached RM 48 billion in 2008, but in first half of 2009 the FDI has dropped to RM4.2
billion.2 Sources of foreign investments mainly lie in Japan, Germany, the USA and
Singapore3.

1
MIDA (Malaysian Industrial Development Authority), Wed. 06/01/10
2
Aseanaffairs, Wed. 06/01/2010
3
German Trade and Investment Center

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

Overview of the Petrochemical Industry

A wide range of petrochemicals are produced in Malaysia, such as olefins, polyolefins,
aromatics, ethylene oxides, glycols, oxo-alcohols, exthoxylates, acrylic acids, phthalic
anhydride, acetic acid, styrene monomer, polystyrene, ethylbenzene, vinyl chloride
monomer and polyvinyl chloride.

In 2008 the Petrochemical Industry is one of the leading industrial sectors with total
investments of RM 57.2 billion. Overall, Malaysian investments in the industry amounted to
RM 35,6 billion (62%), with PETRONAS being the major investor. The largest source of
foreign investments in the petrochemical industry is the USA (40%), followed by Germany
(22.8%) and Japan (14%) .The rapid growth of the industry is mainly attributed to the
availability of oil and gas as feedstock, a well-developed infrastructure, a strong base of
supporting services, and the country's cost competitiveness, as well as Malaysia's strategic
location within ASEAN and its close proximity to major markets in the Far East. The long
term reliability and security of gas supply ensures the sustainable development of the
country's petrochemical industry.

According to the Malaysian Industrial Development Authority (MIDA) reports, Malaysia

holds the world's 24th largest crude oil reserves and the world’s 14th largest natural gas
reserves with a capacity of 88 trillion cubic feet. According to BP’s “Statistical Review of
World Energy 2008”, at the end of 2007 Malaysia had oil reserves of 5.4bn barrels and 2.48
trn cu metres of natural gas. In 2008 691,600 barrels of crude oil have been produced.
Malaysia also possesses the world's largest production facility at a single location of
liquefied natural gas with production capacity of 23 million metric tonnes per year.

The petroleum sub –sector includes refinery products such as naphtha, liquefied petroleum
gas, gasoline, kerosene, diesel, fuel oils, wax, bitumen and lubricating oils. Presently, five
refineries and a gas-to-liquid plant are in operation, processing 714,300 barrels of crude
oil today. Total investments in the refineries amount to RM 25.5 billion of which 71% is
from domestic and 29% from foreign sources.

The main domestic investor in the petrochemical sector is PETRONAS. Besides PETRONAS,
the presence of petroleum giant players such as Shell and ExxonMobil for over 100 years
demonstrates their long-term confidence in Malaysia’s oil and gas industry. Through

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

efforts provided by the government and Petroliam Nasional Berhad (PETRONAS), Malaysia
has attracted investors and major industry players such as Dow Chemical, ConocoPhilips,
Kaneka, Polyplastic, Toray, Dairen, Mitsui, BP, BASF, Idemitsu, Titan, Thirumalai and
Eastman Chemicals. The United States is the largest source of investment in Malaysia’s
petrochemical sector followed by Japan, the United Kingdom, Germany and Taiwan.

Malaysia has forged partnership with other ASEAN members: Vietnam, Indonesia and the
Malaysia-Thailand Joint Development Area (JDA) for the supply of gas. In efforts to further
enhance gas supply is made with the availability of the ASEAN gas grid, a venture that is
made available to all 10 ASEAN countries. Feedstock at competitive prices have made
Malaysia a viable petrochemical hub in the ADEAN region attracting more than USD$9
billion in investments from leading petrochemical and chemical manufacturers.

The six gas processing plants located in Kerteh, Terrengganu ensures the industry
sufficient supply of petrochemical feedstocks while Malaysia’s Peninsular Gas Utilisation
(PGU) trans-peninsular gas transmission pipeline channels gas to industries around the
country. The following exhibit shows the locations of Oil Refineries in Malaysia.

Exhibit 1: Location of Oil Refineries in Malaysia

Oil Refineries Location

Petronas Penapisan (Terengganu) Sdn Bhd Kerteh, Terengganu

Petronas Penapisan (Melaka) Sdn Bhd Tangga Batu, Melaka
Malaysia Refining Company Sdn Bhd Tangga Batu, Melaka
Shell Refining Company (FOM) Bhd Port Dickson, Negeri Sembilan
Esso (Malaysia) Bhd Port Dickson, Negeri Sembilan

Source: Malaysian Industrial Development Authority (MIDA)

Incentives for Growth

The corporate tax rate has been reduced to 25% and a wide range of tax incentives apply
to both local- and foreign-owned companies in Malaysia.4 To ensure companies in Malaysia
maintain their competitive edge, the government constantly reviews these incentives.

Among the incentives include the following:

4
http://www.mida.gov.my/en_v2/index.php?page=taxation

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

1) Incentives for Manufacturing Companies

a. Pioneer Status: Applications received by 31 December 2010 are eligible for
an income tax exemption of 70% or 100% on the statutory income for five
years or
b. Investment Tax Allowance: Investment tax allowance of 60% or 100%
on the qualifying capital expenditure for five years. The allowance can be
utilised to offset against 70% or 100% of the statutory income.
c. Reinvestment Allowance: Reinvestment allowance of 60% for 15 years
on the qualifying capital expenditure. The allowance can be offset against
70% or 100% of the statutory income.
d. Accelerated Capital Allowance: An accelerated capital allowance consisting
of an initial allowance of 40% and an annual allowance of 20% is available
for three years after the reinvestment allowance period.
2) Incentives for High Technology Companies
a. Pioneer Status with a tax exemption of 100% on the statutory income for
five years; or
b. Investment Tax Allowance of 60% on the qualifying capital expenditure for
five years which can be offset against 100% of the statutory income.
3) Incentives for Strategic Projects
a. Pioneer Status with a tax exemption of 100% on the statutory income for
ten years; or
b. Investment Tax Allowance of 100% on the qualifying capital expenditure for
five years which can be offset against 100% of the statutory income.
4) Pre-packaged Incentives
a. Customized packages that cover tax and non-tax incentives.
5) Incentives to Strengthen Industrial Linkages
6) Incentives for R&D
7) General Incentives
a. Industrial Building Allowance
b. Infrastructure Allowance
c. Tariff Related Incentives

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

All applications for the incentives mentioned above, should be submitted to MIDA.5

The World-class Facilities in Petrochemical Zones

To sustain the competitiveness of the Malaysian petrochemical industry, value integration
through inter-plant synergies is promoted. The development of petrochemical zones where
petrochemical plants are clustered together has created a value chain, which ensures the
progressive development of downstream petrochemicals activities. The major
petrochemical zones are in:
• Kerteh, Terengganu
• Gebeng, Pahang
• Pasir Gudang – Tanjung Langsat, Johor
• Bintulu, Sarawak

Kerteh in Terengganu has now transformed into a petrochemical hub. It houses the
Petronas Petrochemical Integrated Complex (PPIC), that links the entire range of the oil
and gas value chain – beginning from upstream exploration and production to the final
stage of petrochemical manufacturing.

Gebeng in Pahang is another petrochemical hub for multinational players like BASF,
Amoco, Kaneka, Eastman and Polyplastics. The petrochemical zone provides an integrated
environment that meets the specific needs of the petrochemical industry.

Pasir Gudang in Tanjung Langsat, located next to the port of Johor is an established
industrial area. To cope with the needs of the growing petrochemical industry, the
adjacent Tanjung Langsat site has been developed to enhance manufacturing capacity.

Bintulu in Sarawak is the largest producer of liquefied natural gas (LNG) in Malaysia. There
are three LNG plants with a combined capacity of 24 million tonnes a year. Furthermore
is has an ammonia/urea fertilizer plant.

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Source: MALAYSIA INVESTMENTINTHE MANUFACTURINGSECTOR; p. 15-19 / MIDA 2009Policies ,
Incentives and Facilities
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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

The following products are manufactured in petrochemical plants in the petrochemical

zones described above.

Exhibit 2: Manufactured Products

Paraxylene, Benzene Acrylic Acid
Ammonia Polyester Copolymers
Acetic Acid Purified Terephthalic Acid
Ethylene Dispersion Polyvinyl Chloride
Ethoxylates Methyl Methacrylates Copolymers
Propylene MTBE
Ethanolamines Polyacetals
Ethylene Oxide Ethylene Glycol
Polyethylene & Low Density Polyethylene Plasticizers
Vinyl Chloride Monomer Butanediol
Ammonia, Urea Tetrahydrofurane
Liquefied Natural Gas BTX
Glycol Ethers Butyl Acetate
Butanol Polypropylene
Middle Distillates Polystyrene
Esters Ethylbenzene, Styrene Monomer
Syngas Expandable Polystyrene
Oxo-alcohols Ethylene Vinyl Acetate
Phthalic Anhydride Gamma-butyrolactone
Polyvinyl Choride

Source: Malaysian Industrial Development Authority (MIDA)

In addition, there are also petrochemical plants located in other parts of Malaysia such as
the ammonia/urea fertiliser plants in Gurun, Kedah and Bintulu, Sarawak, the acrylonitrile
butadiene styrene (ABS) plant in Penang, the methanol plant in Labuan and the nitrile-
butadiene rubber (NBR) plant in Kluang, Johor.

Projects Approved in 2008

In 2008, a total of 16 projects were approved with total investments of RM2.7 billion
compared with 17 projects with total investments of 13.8 billion in 2007. Nine of the
Projects were new projects with investments of RM1.4 billion.

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

Among the Major Projects Approved were:

• A new project by a foreign-owned company with an investment of RM596.2 million
to produce silane monomers, silicone polymers and their derivatives is set-up in
Selangor. These finished products will be used in the production of specialty
chemicals.

• A new project by a Malaysian-owned company with an investment of RM510 million

to under take blending activities to produce kerosene, gasoline, diesel and fuel oil
as a service to their clients using their tank farm facilities in Tanjung Langsat,
Johor

• An expansion project by a foreign-owned company to produce acrylonitril

butadiene rubber latex and styrene butadiene rubber latex with an additional
investment of RM150 million at the existing location in Johor;

• An expansion project by a Malaysian owned company in Kerteh, Terengganu with

an additional investment of RM100 million to expand production capacity of
ethylene. This material is used as feedstock to produce polyethylene resin,
polyvinyl chloride resin and styrene monomer;

• A new project by a Malaysian-owned company with an investment of RM46.7 million

to develop and manufacture cyclo-aliphatic epoxy resins. These materials are
mainly used in weather resistant solvent-based coatings for outdoor applications
such as electrical insulating parts.

Imports
Imports of petroleum including petrochemicals and plastic products had increased by 8.7%
from RM40.4 billion in 2007 to RM43.9 billion in 20086. Currently, Malaysia is a net
importer of petrochemicals. The imported petrochemicals are used as raw materials in the
manufacture of various products by most industries that are subsequently exported as
intermediate or consumer goods. Major sources of imports were Singapore, with imports
valued at RM21 billion, accounting for 72.6%of total imports, followed by Saudi Arabia
(RM1.4 billion), India (RM794 million), and Indonesia (RM771 million).

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Ministry of International Trade and Industry Report 2008

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

Exhibit 3: Imports of Petroleum Products including Petrochemicals and Plastic Products

Source: Ministry of International Trade and Industry Report 2008

Exports
Exports of petroleum products including petrochemicals and plastic products amounted to
RM96.1 billion in 2008, compared wit RM70.1 billion in 2007, an increase of 37.1%. The
increase was primarily due to the high crude oil prices, which peaked at US $ 145 per
barrel (RM478) in July 2008. As can be seen on exhibit 4,exports of petroleum and
petroleum related products, which included LNG and refined petroleum products
amounted to RM76.8 billion in 2008, in comparison RM52.2 billion in 2007, an increase of
47.1%. Major destinations for petroleum and petroleum related products were Japan,
accounting for RM32 billion, followed by Singapore (RM16.5 billion), and Republic of Korea
(RM10.7 billion).Crude petroleum, liquefied natural gas (LNG) and refined petroleum
products were the major exports of the mining sector, with a total value of RM 117 billion
and accounted for 17.6% of Malaysia’s total exports.

Table 4: Exports of Petroleum Products including Petrochemicals and Plastic Products

Source: Ministry of International Trade and Industry Report 2008

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

Outlook The global economy is projected to sustain its growth and export momentum
despite the anticipated slowdown of the US economy. This is expected to benefit the
Malaysian manufacturing sector assisted by the promising investment trends particularly in
industries such as E&E, M&E, chemicals, basic metals and petroleum industries. The
machinery and equipment (M&E) industry has progressed to manufacture high-end specific
M&E, automation equipment, materials handling equipment, and heavy M&E that support
the E&E, automotive and petrochemical, oil and gas, construction and power generation
industries.

Growth in the petrochemical sector will be driven mainly by the developments in the
petroleum and related industry. The price of crude oil, which has risen from US$60 per
barrel in 2006 to more than US$90 per barrel in 2007, will continue to impact the industry
in 2008. The development of the petrochemical industry in Malaysia is also dependent on
additional supply of feedstocks.

Industrial Master Plan 3 (IMP3)

Malaysia will continue to fine-tune its policies and incentives to ensure that it remains a
competitive location for both manufacturing and services activities. The strategic thrusts
for the petrochemical sector in the IMP3 are as follows:
• Expanding and enhancing the value-added of existing capacities and broadening
the range of petrochemicals produced
• Diversifying into manufacturing related services and support industries;
• Enhancing linkages with downstream industries, in particular plastics and
oleo chemicals
• Intensifying the development of technologies in materials and product
applications
• Improving chemical process technologies and the application of catalysts to
increase yields
• Undertaking the full integration of existing petrochemical zones in Kertih,
Terengganu; Gebeng, Pahang; and Pasir Gudang-Tanjung Langsat, Johor
• Establishing new petrochemical zones in Bintulu, Sarawak; Gurun, Kedah;
Tanjung Pelepas, Johor; and Labuan;

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

• Making feedstocks available at competitive prices

Malaysia during the current Economic Recession

The current economic downturn and financial crisis affect Malaysia as well. Malaysian
banks, however, have not been involved with the U.S. and western financial markets to a
large extent, and are therefore not affected by the crisis in this respect.

On the contrary, the financial turmoil has created an upward trend in the Islamic Banking
Industry as the country is trying to be a world hub in "Islamic Banking". Furthermore,
Malaysia is a very young nation with an average age of less than 24 years (Germany: about
42 years), and this drives the consumption. Malaysia’s wealth of mineral resources for
example oil & gas, natural rubber, palm oil, etc. contributes to the state and private
revenues largely; likewise these revenues promise future income. Malaysia’s central role
in the prosperous ASEAN region with its 570 million people serves further as a regional
home market. The Electronics & Electrical (E & E) is the only highly affected sector by the
crisis resulting from its strong dependence on the U.S. and the rest of the world.

Malaysia’s government takes stern measurements and introduces government-driven

stimulus packages to support the economy. On 10th of March 2009, the government
introduced a second economic package for the year 2009. Further to this, an additional
"mini budget" amounting to 60 billion RM (about 13 billion Euros) shall be disbursed
between 2009 and 2010.

Malaysia's stimulus package is comparable to some mega-programs by the United States,

China or Singapore, if it is set in relation with the nominal economic performance
amounting to 740 billion RM in 2008. It contains aids to accelerate implementation of
infrastructure projects, a car-scrap bonus, and guarantees working credits and funds for
labor market. The Ministry of Finance and other economic cycle analysts expect the
Malaysian economy will contract at a range of -1 to -5% in 2009.

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 Malaysian-German Chamber of Commerce & Industry, Market Watch 2010 – The Petrochemical Sector

Conclusion
With the full implementation of AFTA, petrochemical manufacturers in Malaysia will
benefit from a single market with a total population of 580 million, a combined GDP of
US$ 1.07 trillion and a total trade of US$ 1.34 trillion. Manufacturers based in Malaysia will
also benefit from the access to a much larger Asia Pacific market. With China being a net
importer of petrochemicals and its entry into the WTO will also open up new business
opportunities for petrochemical manufacturers in Malaysia.

Malaysia has the infrastructure and system in place for petrochemical manufacturers to
compete favorably with regional players. The Malaysian government will implement
measures to further enhance the business environment, infrastructure development,
human resources support and the position of feedstock supply, in which all appear to be
contributing factors for a stable and conducive investment environment for the future
development of Malaysia’s petrochemical industry.

Trade Fairs in Malaysia 2010 & 2011

Offshore Asia Conference & Exhibition 2010

16 to 18 March 2010
Kuala Lumpur Convention Centre

OGA 2011
th
13 Asian Oil, Gas & Petrochemical Engineering Exhibition
8 to 10 June 2011
Kuala Lumpur Convention Centre

Contact:

Mr. Thomas Brandt: thomas.brandt@malaysia.ahk.de

Ms. Schvonne Choo: schvonne.choo@malaysia.ahk.de

We hope the market report serves you with actual information on the Malaysian market. Our core
business is to establish contacts, finding distribution partners, project acquisitions, etc. Our
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