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Malaysia: New year looks bright for construction industry

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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: Push for liquefied natural gas

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As gas consumption levels reach record highs in Malaysia and across the continent, the country is positioning itself as a regional trade centre for liquefied natural gas (LNG). With a series of capital-intensive LNG investments, Malaysia will likely see a strong increase in LNG import-export volumes for some time to come. However, muted economic growth in China and India, and with it slowing demand, could limit the country’s ability to export its new LNG production.

Heavy gas subsidies and increasing LNG demand, which has increased from 315bn cu feet in 1990 to more than 1260 cu feet in 2010, a compounded annual growth rate of 7.2% — is expected to result in Malaysia’s consumption rate outstripping production between 2011 and 2016. This trend may lead to a potential gas shortage beginning in 2014, signalling the need for Malaysia to expand its LNG import infrastructure.

To this end, Malaysia has invested in a number of infrastructure projects, including an LNG re-gasification terminal (RGT), located offshore near the Sungai Udang port in Malacca. The RGT was developed by the gas-processing subsidiary of Petroliam Nasional (Petronas), Petronas Gas, and work was completed in mid-2012.

The RGT includes an island jetty with a re-gasification unit, two floating storage units and a new 3-km, sub-sea pipeline that connects to the onshore gas pipeline network. According to the Prime Minister’s office, the facility is expected to commence operations this month. Once it is operational, the RGT will have the capacity to process and store up to 3.8m tonnes per annum (tpa) of LNG, Petronas Gas said in a statement.

Current supply contracts with the new facility include a deal with Norway-based Statoil to supply 1bn cu metres of LNG over three and a half years, a deal with France-based GDF Suez to supply 2.5m tpa also over three and a half years, and a 20-year deal with Qatargas for 1.5m tpa. Petronas is also looking to import gas from the Santos-Petronas Gladstone LNG project in Australia, with the first shipments of LNG to arrive in 2014, once the deal is completed.

To further enhance LNG import capacity, a second re-gasification plant and import terminal is being planned at the Pengerang Integrated Petroleum Complex (PIPC) in Johor. The $56bn project will include oil refineries, petrochemical plants and a $1.3bn investment allocated specifically for the LNG terminal and the re-gasification plant.

The investment will be a joint venture among local engineering firm Dialog Group, Netherlands-based oil and gas storage company Royal Vopak, and the Johor state government, with the first phase of construction expected to be complete by 2014. Storage capacity at the terminal is expected to be around 5m cu metres and will enable international users to store and trade LNG.

According to Mohd Yazid Jaafar, the CEO of the Johor Petroleum Development Corporation, studies by oil companies and the Performance Management Delivery Unit (the state body responsible for overseeing the implementation of the country’s economic transformation programme, PEMANDU) show that the PIPC will contribute RM17.7bn ($5.73bn) to gross national income by 2020, with the PEMANDU study also showing it will provide 8500 high-skilled job opportunities by 2020.

In addition to the onshore LNG developments, Petronas has recently awarded the Technip-Daewoo Consortium with a contract to develop Malaysia’s first floating LNG (FLNG) facility, which is expected to be operational by 2015. The FLNG facility is expected to produce 1.2m tpa and increase Malaysia’s overall production capacity from 25.7m tpa to 26.9m tpa.

The Sabah-Sarawak Gas Pipeline (SSGP) in Borneo, meanwhile, has reached 85% completion and is now entering the final phase of development. According to Shaiful Bahrin Hashim, the senior project manager at SSGP, “We estimate the gas to start flowing by April 2013, if everything goes as planned.” The pipeline is approximately 521 km in length and will deliver natural gas from a terminal in Kimanis to an LNG facility in Bintulu.

With high population growth rates across Asia and increasing demand for power, Malaysia’s ongoing natural gas investments may be a highly strategic asset entering the second half of the decade, particularly if it can secure its position as a major supplier now. If, however, demand slows considerably in China, for which the IMF recently downgraded its 2012 GDP growth prediction of 8% to 7.8%, and India, which also just saw the IMF’s GDP growth estimate for the year fall from 6.9% to 6%, Malaysia could be faced with more capacity than it can use.

Still, the new projects should provide Malaysia with substantial manoeuvrability in the LNG market, both in terms of expanding export capacity, as well as developing a more sustainable import mechanism to meet domestic consumption trends.

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Malaysia: Islamic finance pensions

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Moves to liberalise Malaysia’s pensions market are expected to galvanise the Islamic finance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confidence in the sector.

On July 23, the international press reported that Malaysia was introducing “sweeping reforms” to its pension system. The changes introduce a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF). The PRS will allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment. Currently, the EPF collects pension contributions and invests the cash; contributors can place up to 20% in a single mutual fund.

By facilitating investment in private products by individuals, the reforms are expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73bn ($22.92bn) by 2020. Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – make it clear that increasing investment in Islamic products is one of the aims of the changes. “The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and CEO of the Federation of Investment Managers Malaysia, told international press. Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six will be Islamic, with the expectation that there will be more to come. The eight existing PRS providers ¬– all of which have sharia-compliant arms – can offer between three and seven conventional products through the system, but can provide up to 10 products if they offer Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors. It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7% of the $84.4bn issued globally last year and 71% of the $43.5bn launched in the first quarter of 2012 (a 55% increase on 2011’s first quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to $1.5bn in sukuk issues to tap low-cost long-term funds and increase its capital efficiency. It will be the first Asian telecoms firm to issue multiple currency sukuk, according to the company. The launch was “strategic” and targeted at investors in the region, as well as the Middle East and Europe, and officials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies are likely to provide further issuances in the near future as Malaysia rolls out its ambitious Economic Transformation Programme, which envisages large investments in infrastructure and services and aims to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continues to be a world leader, the industry’s rise to global prominence is relatively new. As elsewhere in the world, growth has brought on regulatory challenges, and some parts of the industry lag behind others.

“Sharia-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counts the EPF as its biggest customer, told OBG. “Asset management is still a very locally driven business in Malaysia. There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggests that “innovation needs to slow” so that Islamic finance can put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market may still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector is needed to support and consolidate the industry. “Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

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Malaysia: Confronting the energy dilemma

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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: A farmer’s market

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Recent efforts to upgrade Malaysia’s agricultural sector that include increased incentives for farmers to learn new techniques and adopt advanced technology are expected to lead to greater harvest yields and help meet rising domestic demand for food products.

While the sector contributes around 12% of GDP and provides employment to some 16% of the national workforce, most of this is concentrated in two key segments, palm oil and rubber production. The contribution of the rest of the agricultural sector is estimated at 4%, though its share of employment is higher, as much of Malaysia’s farming is still labour-intensive. At present, the input of the non-oil and rubber farming sectors is approximately $6.5bn a year, but the government wants to see this more than double by 2020 to $16bn.

To achieve this, Malaysia is trying to adopt smarter farming techniques. Agriculture was one of 12 separate National Key Economic Areas (NKEAs) identified under the Economic Transformation Programme (ETP), launched in late 2010 as part of the government’s efforts to increase national income to more than $500bn by 2020 and achieve developed nation status. The ETP made a clear distinction between agriculture and the palm oil and rubber industries, which fall under a separate NKEA.

The ETP set out a number of initiatives to boost the sector, including a growing focus on export cash crops (tropical fruits), tapping into the global herbal products market and increasing the usage of advanced technology to improve yields.

Though the government’s master plan for agriculture foresees a doubling of revenue, it only projects a modest increase in employment, with technology replacing labour-intensive practices and a shift in rural employment structures. While it is unlikely that agriculture employment levels will lift substantially over the coming decade, the growing pool of rural labour is expected to be taken up by a rise in food-processing operations, with the value-added component of agriculture seen as one of the segments to record the highest level of expansion.

On April 5, Muhyiddin Yassin, the deputy Prime Minister, said it was important for farmers to explore value-added agriculture activities, rather than just limiting themselves to cash-crop production. Farmers should look at venturing into food processing or producing material from by-products to earn extra money, he said during the opening of a fertiliser plant.

“To move forward, farmers must find new opportunities to enable them to earn long-term income,” Muhyiddin said.

In early April, Noh Omar, the minister of agriculture and agro-based industry, stated that the government was trying to create an environment in which farmers become businessmen and view agriculture as an industry, rather than merely growing produce.

“Our role is to facilitate the process and invest in capacity building in order to grow the agri-industry to become a key contributor to the nation’s economic wealth,” he said when speaking with the New Straits Times. “This has created opportunities for farmers to practice high-value agriculture and reach markets at all levels.”

Another opportunity recently unveiled by the government aims to protect local fruit and vegetable growers. In late March, the state announced that as of 2015, farmers’ markets and National Agribusiness Terminal (Teman) outlets will no longer be allowed to sell imported fresh produce.

According to data issued in late March by the Ministry of Agriculture and Agro-based Industry, some 40% of vegetables sold at the Teman outlets – centres set up by the state to market agricultural products – are imported from neighbouring countries.

As most of these vegetables are grown in Malaysia, the move by the government may not encourage the development of new product ranges, but it should help growers by reducing competition and giving them a stable market. A possible downside of the new policy, however, especially if it was extended to restrict fresh food imports beyond the limited scope of the farmers markets and Teman outlets, is that retail prices could be pushed up, as some of Malaysia’s neighbours have lower production and labour costs.

This could be offset to a large degree by improvements in economies of scale and efficiency, with higher production and turnover, as well as technological advances, helping to push down costs. These savings could then be passed on to the consumer.

Over the past 50 years, the Malaysian economy has become far more diverse, moving away from a time when agriculture accounted for 30% of GDP and provided employment for half the workforce.

While the government wants to see agricultural output increase, it is likely that other sectors of the economy will continue to outstrip rural production. By promoting smarter farming, and seeking to supply niche markets, Malaysia will come closer to achieving food security and increasing earnings.

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