write2rest

Previously I said that the root cause of the Lynas controversy is our ‘need’ for things that need rare earths. These things include cellphones, disk drives and television sets. I also said that China supplies over 95 % of the world demand for rare earths, and that the Lynas plant could supply up to 35 % of world demand.

I added that the attitude of the government of Malaysia toward it’s citizens is less like that of the government of Australia and more like that of the government of China. Much of what I said was sparked by the observation that Lynas has chosen to do something which seems rather strange to those who remember tin mining.

Malaysia was at one time teeming with tin mines. The tin was dug up, processed into high purity ingots and shipped worldwide. We didn’t ship ore. We shipped tin.

Similarly, we don’t ship what we harvest from oil palms. Instead, we convert the fresh fruit and bunches into products which we sell worldwide. Malaysia is a world leader not only in growing oil palm, but also in processing oil palm and it’s effluents.

So, why is Australia – a mining nation – not processing the ore into the final product?

I have a degree in mechanical engineering. I’ve worked in industry in the UK and in Malaysia. I’ve been responsible for factory design, construction and maintenance. I’ve been responsible for compliance with statutory requirements and corporate policies.

I’ve also been responsible for evaluating investment decisions. I have personal experience of reviewing tax benefits, extent of regulations, predictability of regulators, etc. when making investment decisions.

I have a generally good opinion of professionals, shareholders and regulators. I’ve yet to meet professionals whose goal in life is to harm others, but I know how corruptible we are: Bukit Merah is only one of many proofs of how low we can fall.

In response to my last piece on Lynas, someone commented that one key reason for Lynas coming to Malaysia is the shortage of water in Australia and the abundance of water in Malaysia. I tried to pursue that point, to see if I could convince myself of the logic.

I learned that the Lynas plant is expected to discharge upto 213 cubic metres of treated water per hour, into the Sungai Balok river. That’s a lot of water – which is subsidized by the taxes we pay.

According to a Malaysian government website, different states charge different rates.

For industrial usage, in 2009, Pahang charged RM1.45/cubic metre, while Johor charged RM 2.93/cubic metre. [In the Peninsula, the cheapest was Penang at RM 0.94]

If Pahang charges Lynas RM 1.45 per cubic metre, the annual water bill for Lynas would be about 2.7 million Ringgit. If the cost of treating the used water before discharge is the same, it will cost about 5.4 million Ringgit/year for water purchase and treatment.

How does this compare with the cost in Australia?

I’m no expert, so I’ll just pick a number which goes with what seems like an appropriate description. “Metropolitan non-residential water, 350 mm meter,” costs RM 5.48/cubic metre: nearly four times more expensive than in Pahang (Gebeng) – assuming the Australian water authority agrees to supply the required volume.

If we again assume the cost of treatment before discharge is equal to the cost of purchase, the total cost of water purchase and treatment in Australia will be about 20.5 million Ringgit/year.

Is the cost of shipping concentrated ore from Mt Weld to Kuantan less than 15 million Ringgit/year? I have no idea. I do know the cost will vary due to fuel price escalation, and I do know shipping is subject to risks.

It’s hard to believe water drove the decision, but that’s what Lynas says.