Malaysia: New year looks bright for construction industry

While 2013 will produce a number of challenges for Malaysia’s construction sector, including a degree of uncertainty surrounding the approaching election and a shortage of workers, the industry is still expected to post a decent performance this year.

Malaysia goes to the polls in June at the latest, with most pundits predicting a win for Prime Minister Najib Razik’s ruling Barisan Nasional and his coalition allies, although there have been suggestions that the race could be close.

Analysts remain divided, however, about whether nerves among investors prompted by the forthcoming election will produce knock-on effects of any significance across the construction industry.

In an advisory note to investors issued in mid-December, market analyst Nomura International said it remained bullish on construction, energy and banking. The firm’s confidence was shared by Alliance Research, which on December 17 gave a buy recommendation to construction shares.

JP Morgan Securities, however, was more cautious, placing a neutral buy advisory on Malaysia, due to what the firm’s executive director of equity research, Mak Hoy Kit, called election overhang. “Investors will be worried if the opposition wins. When there is uncertainty, investors typically act negatively,” Mak said on December 12. An opposition victory could leave question marks hanging over the current government’s infrastructure programmes, he said, which would likely go ahead as planned if the Barisan Nasional is returned to power.

A similar muted warning was also sounded by the government, when, at the end of November, Deputy Finance Minister Datuk Donald Lim said that although the construction sector’s contribution to the economy would remain significant, the new year would bring a slight reduction in activity.

Construction’s contribution to GDP is expected to fall to 13.5% in 2013 from 15% in 2012, with tourism and the services industry earmarked for a bigger role. “In 2013, we believe domestic demand will still be there but we expect the construction sector to slow down a little. Other industries would contribute to our growth,” Lim said.

The minister said that the slight drop in construction activity could be attributed to the completion of key, large-scale projects, which the government drove through to help the economy recover from a flat patch caused by the global financial crisis.

The industry is set to receive a further boost from a wave of new developments earmarked for 2013, including rail projects worth an estimated $52bn that should be launched in the coming year, prompting some analysts to suggest that while growth in other sectors will largely drive Malaysia’s economy, the construction sector’s contribution to GDP could still remain stable. Malaysia’s GDP is forecast to grow by at least 4.5% this year.

However, while the construction sector is expected to have a solid 2013, it remains hampered by a shortage of skilled labourers, with rapid growth in recent years triggering a drain on its workforce. In late November, the Master Builders Association Malaysia (MBAM) called on the government to do more to facilitate the training of building workers or run the risk of supply-side bottlenecks delaying new projects.

MBAM’s president, Matthew Tee, said that with over a third of the industry’s existing workforce approaching the age of 50, measures needed to be taken to replenish the ranks of the sector. Suggestions include the association’s proposal that the government set up vocational schools that would train construction workers. However, a programme will take time to produce results, and cooperation with the private sector would also be essential for providing work experience and training to students.

In the short term, the government is acting on a proposal floated by MBAM and other industry groups to bring in foreign workers to bolster the ranks of Malaysia’s construction sector workforce. At the beginning of December, the government announced the signing a memorandum of understanding (MOU) with Dhaka that set out the terms for Bangladeshi workers to be employed in Malaysia. The first wave of foreign labourers is due to arrive in February.

If, as is widely expected, Malaysia’s current government wins the forthcoming election, the country’s construction firms should benefit from a wave of new, state-backed infrastructure projects which, combined with rising demand for residential properties, suggests that predictions of a bright 2013 for the sector appear to be well founded.

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Malaysia: New year looks bright for construction industry

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Malaysia: Confronting the energy dilemma

Committed to reducing its carbon intensity by 40% by 2020, Malaysia is currently facing some tough decisions on whether natural gas or coal will be the best energy source to meet its rapidly growing consumption needs and looming environmental targets.

While some officials say coal will dominate the future energy mix due to its cost benefits, others believe gas will lead the way, largely based on international trends and the overall environmental benefits. At present, some 60% of the country’s power is generated by gas, 30% by coal and 10% by hydropower plants. As of January 2011, the country is estimated to have 85trn cu feet of gas reserves and proven oil reserves of 4bn barrels.

In May of this year, Peter Chin Fah Kui, the minister of energy, green technology and water (KeTTHA), said the government was moving towards more coal-driven power plants in order to ensure the cost of electricity will not burden the public.

“We are planning to make the shift to 44% coal and 46% gas. We do not want to be too dependent on coal either. The price of gas has gone up and we do not want to burden the public,” Chin said, while speaking with The Malay Mail in June, adding that coal prices are less prone to market variations.

In the same month, the government confirmed it plans to invest $3bn through state-owned energy provider Tenaga Nasional Berhad (TNB) for the construction of four new power plants over the next five years, including two hydropower plants and two coal-fired facilities.

Construction of the Hulu Terengganu (250 MW) and Ulu Jelai (378 MW) hydropower plants, and a 1000-MW coal-fired plant in Manjung, is expected to be complete by 2015. Meanwhile, the fourth, a 1000-MW coal-fired plant in Tanjung Bin, is scheduled to be operational by July 2016.

Discussing the plans, Che Khalib Mohamad Noh, the outgoing president and CEO of TNB, said that when the four plants are operational, national capacity will increase to 2630 MW from the current 2050 MW.

However, Khalid told local media that gas-fired plants will be the focus of future projects, as they have a more minimal impact on the environment. “Gas accounts for 40% of the world’s power generation and this is expected to grow to 60% by 2030,” he said.

On the other side of the debate, KeTTHA’s desire to shift to coal is likely explained in part by a gas supply shock in 2011 that saw daily supply fall from the normal 1050m standard cu feet per day (cfd) to as low as 850m cfd.

To prevent this from happening again, a new liquefied natural gas (LNG) regasification terminal in Melaka, which will be operated by Petronas is due for completion in August. In June, plans were also approved for the firm to build an offshore, floating LNG plant by 2015.

While the Melaka terminal has the capacity to produce 530m cfd of gas, the offshore plant ? set to be the world’s first ? will allow Petronas to drill and ship gas from fields that were either too small or too remote to be profitable previously.

As both LNG and coal will require almost 100% imports in the future due to the depletion of national reserves, another option being considered is nuclear power. Chin confirmed in March that Malaysia was looking to build two 1000-MW nuclear power plants by 2022 to counter an “imbalance” in its energy supplies, despite ongoing environmental concern regarding the safety of nuclear power.

Renewable energy is seen as a greener and safer alternative to the nuclear, gas and coal options, and Kuala Lumpur is committed to a 5.5% contribution from renewables by 2015. However, renewable energy has yet to take off in the country, with investors often seeing it as a risk, due to unproven technologies and potentially high tariffs.

While in late 2011 the country adopted a sophisticated quota system on feed-in tariffs ? a policy mechanism designed to accelerate investment in renewable energy ? critics say its solar segment has been oversubscribed and that the country should focus more on biomass, given the huge amount of municipal waste and biomass generated by palm oil plantations.

Malaysia is also planning to adopt a number of energy efficiency measures. In June Chin said a draft law to mandate energy efficiency would be tabled in 2013, with provisions to include the banning of incandescent light bulbs and the mandatory import of energy-efficient refrigerators. In June, Tan Sri Shamsul Azhar Abbas, the CEO of Petronas, the state-owned oil and gas company, said at the World Gas Conference that heavy subsidies on natural gas may promote economic growth but also lead to energy inefficiency. Indeed, Malaysia began reviewing gas prices last year and aims to achieve market parity by December 2015.

The government insists coal-fired energy will reduce electricity costs and help meet rising demand, however, even with the introduction of new technologies, the burning of fossil fuels will impact environmental goals. Global signs that the coal market is more susceptible to “resource nationalism” than gas suggest the latter will dominate future world energy trends.

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Malaysia: Ties that bind

The recent strengthening of bilateral ties between Malaysia and Singapore bodes well for their construction sectors, as several planned projects between the two countries should bring lucrative business opportunities to both. A foreseen labour shortage in Malaysia, however, could stymie some projects’ development.

The construction and services sectors are expected to be the Malaysian economy’s main growth drivers in 2012 amid a forecasted drop in exports due to the difficult global economic environment. The government has targeted growth of 7% for the construction sector in 2012.

“Thus, construction projects will be a key economic stimulus due to their multiplier effect,” said Kwan Foh Kwai, the president of the Master Builders Association Malaysia (MBAM), when speaking with local media outlets at the end of December.

On January 5, the leaders of Malaysia and Singapore announced plans to boost transport links between the two nations, with a road tunnel and water taxi service the first of many projects.

Plans are already under way for joint operations to begin building projects worth $9.8bn and a mass-transit railway system linking Malaysia’s southern Johor state and Singapore that could begin operations by 2018. The leaders said they are also now looking to partner in areas such as aviation, with Malaysia’s Senai International Airport potentially cooperating with Singapore’s Changi Airport.

“There are many more areas for potential cooperation,” Malaysian Prime Minister Najib Razak told reporters in early January after talks with Singaporean Prime Minister Lee Hsien Loong. “All the current agreements that both countries have managed to reach will pave the way for stronger bilateral ties.”

The agreement was widely seen as symbolic of continued improvements in relations between the two neighbours, which between 1963 and 1965 formed one nation. Relations improved in 2011 when a decades-old land usage dispute was resolved, which saw Malaysia agree to relocate its railway station away from Singapore’s central business district.

Both governments appear to be eager to continue the process. “There should be more new initiatives taken between both countries,” the Singaporean prime minister told local reporters.

Examples of these new initiatives are many. Last year, Khazanah Nasional and Temasek Holdings, the state-owned investment companies of Malaysia and Singapore, respectively, announced plans to cooperate on property projects, including $8.67bn of retail and residential developments in Singapore’s downtown area. These developments will incorporate the former site of Malaysia’s train station.

The two investment firms also plan to jointly construct RM3bn ($968.73m) of projects in Malaysia’s southern Iskandar economic development zone region that will include retail and residential offerings. Located adjacent to Singapore, at the apex of Malaysia’s East Coast Economic Corridor (ECER), Iskandar is a territory of around 2217 sq km.

“The development of Iskandar and its success is very important for Singapore as it will benefit both sides in many ways,” said the Malaysian prime minister.

The planned railway linking southern Johor state and Singapore will make Johor Baru City — long the entry point for many visitors to Malaysia from neighbouring Singapore — something of a satellite city for Singaporeans, who are keen to take advantage of Iskandar’s much lower cost of living.

However, there has recently been a shortage of foreign labour in Malaysia, causing some to question how all these projects will get built – and causing some sector leaders to call for immigration changes to address this issue.

Foreseeing such an industry-wide labour shortage on the horizon, the MBAM appealed on January 20 to the Home Ministry to lift a temporary suspension of workers’ quota applications.

MBAM’s Kwan said the ministry has not allocated a new foreign workers’ quota, which means contractors have been unable to secure enough workers for their projects.

“The construction industry is facing a severe shortage of manpower resources as too many construction companies in Malaysia are competing for a limited supply of talent,” Kwan said in a statement. He added that the shortage of foreign workers could undermine the many construction projects planned under the 10th Malaysia Plan and the Economic Transformation Programme.

“We face a shortage in terms of volume and quality of skilled workers, technicians and supervisors,” said Kwan, adding that he hopes the government will relax the policy involving the entry of new foreign construction workers.

With the bulk of the country’s economic performance for the year hanging in the balance, the Home Office will likely be under increasing pressure to act quickly on the quota issue. However, with elections widely expected in March, the hot-button issue may well be one that is not easily solved. Meanwhile, builders and investors on both sides of the Straits of Johor will no doubt be eager to break ground on the many contracts that have now been signed.

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Malaysia: Ties that bind

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