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Malaysia is the classic reference to the Southeast Asian petrochemical industry, where the discovery of oil and gas resources triggered the development of downstream petrochemical and LNG businesses, led by a national-owned company, in this case Petronas. The sector then attracted foreign investors to a burgeoning export-oriented economy. With Petronas turning 50 years old since its establishment in 1974, one thing becomes obvious in Malaysia’s half-a-century-old chemical journey: while focusing on maintaining the upstream to a production rate of around 2 million barrels per day (bpd) in oil and gas equivalent, and establishing into a significant player in the methanol (fourth-largest globally), ammonia and urea (second largest in Southeast Asia) and other basic chemicals, it stopped flat at intermediates, failing to evolve into more profitable specialty chemicals. This is something it wants to change. 

Sometime over the last few decades, Malaysia’s chemical sector stagnated. In volume terms, the production index flatlined, according to Statista, even though output has modestly increased by about 4.5% per year, according to official sources. In terms of its products basket, base chemicals such as methanol, ethylene, propylene and butadiene make for the largest value contributors, followed by organic intermediates, fertilizers, basic oleochemicals like fatty acids, fatty alcohols and glycerin, and plastics and polymers. Specialty chemicals share is negligible. Malaysia’s own economy, heavily reliant on manufacturing, outgrew the chemical industry. For instance, the domestic electrical and electronics sector, one of the largest in Southeast Asia, is forced to import specialty chemicals. According to Malaysia’s trade figures, the country imported RM 7.5 billion in specialty electronic chemicals in 2022. More than that, Malaysia’s economy has matured; the country has a high human development index, and productivity levels second only to Singapore in Southeast Asia. As a result, its cost base also went up, becoming less competitive than Indonesia, China, or the Middle East. 

A lofty US$20 billion investment in the “RAPID” (Refinery and Petrochemicals Integrated Development) as part of the Pengerang Integrated Complex (PIC), was envisioned to help Malaysia position itself deeper into specialty chemicals. The complex is in the southern state of Johor, about 400 km away from Kuala Lumpur and closer yet to Singapore. It is owned equally by Petronas and Saudi Aramco, under subsidiary PrefChem. Though completed in 2018, it has since dealt with multiple issues, including a fire that killed five employees and led to a shutdown of the polymer lines in 2020. PrefChem resumed in 2022, and has since incurred other temporary maintenance halts. The complex is the largest in the region, consisting of a 300,000 bpd refinery, a naphtha cracker able to produce up to 3.3 million tpa of propylene, C3 and C4 olefins and derivatives, and includes a polymer complex producing polypropylene (PP), LLDPE, and HDPE, as well as a glycols complex producing MEG and DEG.

Ongoing operational issues as well as lower market prices have hindered the performance of Petronas’ chemical business (Petronas Chemical Group or PetChem) with earnings bottoming in FY 2023. PetChem reported a 73% year-on-year drop in earnings at the end of 2023. Petronas is certainly not the only one to report depressing numbers. Lotte Chemical Titan, a subsidiary of South Korea’s second-largest chemical group, has been rumored to put its Malaysian assets on sale for about US$600 million, after bleeding money in recent years. In 2023, Lotte Chemical’s basic petrochemical division recorded losses of 201.5 billion won. The Group already divested its petrochemical facilities in China to help alleviate losses and is also looking for a buyer for its Pakistani PTA unit. Lotte confirmed the rumor concerning its Malaysian assets, which includes two plants in Johor with a capacity of 3 million tpa of polyolefins. 

While petrochemical assets are let go of, specialty assets are in high demand. In a more direct effort to boost its specialty portfolio, Petronas acquired Swedish specialty company Perstorp for US$1.5 billion in 2022. Perstorp brought in a strong portfolio of resins and coatings, engineering fluids and animal nutrition products, together with seven manufacturing sites and three R&D centers. More M&A activity came from Hextar, a domestic agrochemical player, which bought multiple Malaysian specialty chemicals companies in recent years. In 2023, it completed the acquisition of Propel Chemicals, expanding its specialty chemicals for the oil and gas market. In 2021 it acquired all shares of Nobel Synthetic Polymer, a producer of chemical derivatives, coatings and related products, not long after taking over two specialty cleaning chemical companies, Alpha Aim and Chempro Technology earlier that same year. At the closing of the 2023 financial year, Hextar reported stable margins and revenues more than seven times higher than prior to the acquisitions, but below the record numbers of 2022.

With the local production sector unable to meet the domestic needs for specialty chemicals, distributors have found a prolific gap. Multiple international chemical distributors are hurrying to tap into the country’s need for complex molecules, especially in the life sciences sector. Azelis bought ChemSol, a distributor of raw materials in personal care, cosmetics and household markets in 2022; IMCD bought Euro Chemo-Pharma and its wholly-owned subsidiary Biofresh Green last year; and more recently, DKSH acquired Elite Organic, with customers in the pharma and nutraceutical sectors: “Elite Organic is a pharmaceutical and nutraceutical company, with a strong footprint in health supplements, whereas DKSH Malaysia has a stronger presence in specialty industrial chemicals. This complementary match enables us to expand strategically in these key areas,” commented Victor Liew, director of performance materials for Indonesia, Malaysia and Singapore.  

The chemical industry is currently a solid contributor to Malaysia’s economy, representing 6% of its GDP and a significant source of FDI, accounting for 11% of inflows. Despite its importance, the industry stayed for too long in the comfort zone of basic chemicals and intermediates. The current supply cycle is a painstaking reminder that differentiation matters. The Malaysian chemical industry is starting to feel more “loved” after the government identified it as one of the high-growth, high-impact sectors in the National Industrial Master Plan (NIMP 2030).

Futureproofing policies 

“We must question where we go from here onwards and push forward into the specialty space. There is a lot of resistance from basic raw material producers to investing in specialty chemicals. However, to stay competitive, we need to move up the value chain. Oil and gas will eventually deplete and strength in feedstock availability and competitiveness is no longer as it was. The industry needs to add knowledge-based value,” commented Dato’ Muhtar Hashim, executive director at the Chemical Industries Council of Malaysia (CICM), echoing an industry-wide sentiment.

CICM was part of the long-anticipated Chemical Industry Roadmap (CIR), launched by the Ministry of Industry and Trade (MITI) together with its affiliated agency, the Malaysian Investment Development Authority (MIDA), last year. The CIR provides the much-needed top-down directive the industry needs. Its aspirations are interrelated along the theme of spearheading the specialty sector: increasing the value add of the industry through diversification into specialty chemicals; enhancing industry integration between upstream and downstream; boosting competitiveness in export markets; improving the industry’s sustainability; and introducing new technology. 

In raw numbers, Malaysia would like to increase the industry’s gross value add to GDP to 4.5%, up from the current 3.4%, by the turn of the decade. That is the equivalent of adding RM40 billion in incremental value. Another key goal is to become the first destination for FDI in ASEAN for specialty chemicals investment, as well as becoming a top two exporter in the region. These two final aspects are closely correlated, first because Malaysia alone cannot garner the capital to develop its specialty sector and snap out of a lackluster state, with most (over 84%) of its current investment in manufacturing coming from outside the country, according to MIDA, and second because Malaysia requires strong export outlets, its domestic market alone being insufficient to galvanize high-capital, high-tech investments. 

According to MIDA, Malaysia attracted RM152.0 billion in approved investment in manufacturing last year, 80% more than in 2022. The chemical industry was the third largest recipient, after electrical and electronics (E&E) and machinery and equipment. To accelerate investment, Malaysia has introduced a  Special Tax Incentive or Relocation scheme where investors are spared from paying tax for 10 years for new investments in the manufacturing sector of a value between RM300 million and RM500 million, which goes up to 15 years for investments exceeding RM500 million. A similar exemption is applicable for existing investors relocating overseas facilities into the country. A legion of other pro-business fiscal incentives are available under other schemes, such as the Pioneer Status offering an investment cushion from income tax for up to 10 years from the day of starting production, as well as Investment Tax Allowance and Reinvestment Allowance mechanisms presenting alternative routes for qualifying capital expenditures. A Principal Hub (Global Services Hub Tax) incentive will also become effective after 2024.

A key focus for these incentives is bolstering Malaysia’s “hub” quality. In reference to the “China Plus” trend of relocating investment to more neutral countries outside the tariff war zone, Malaysia has launched its “Plus One” policy. To reinforce itself as an ideal manufacturing hub, the government highlights Malaysia’s good relationships and free trade agreements with multiple partners, with 16 Free Trade Agreements currently in place, of which seven are bilateral and nine are regional, as part of the ASEAN, RCEP, or CTPP. The potential market size covered by these FTAs spans 4 billion people. 

Interestingly, Malaysia is strategically knocking at the doors of Eastern investors, primarily from Japan and Korea, as part of its Look East Policy. Trade with Northeastern partners is expected to grow in the coming years. Japan is already the fourth-largest trading partner and fourth-largest investor in manufacturing, with RM91.89 billion worth of projects (2,778 projects) having been implemented to date in Malaysia from Japanese FDI. Japanese firms have been on the growth hunt abroad after dealing with a recessionary economy at home. The Economist writes that the revenue booked by foreign subsidiaries of Japanese manufacturers is at a record 29%, a large jump from where it was in 1996, at just 7%. In Malaysia, there are 1,602 Japanese companies involved especially in the automotive-related businesses. 

While automotive, semiconductors and energy are Japan’s favorite sectors in Malaysia, the chemical sector is the main attraction point for South Korea. Last year, Malaysia secured RM24 billion in potential investment from the Trade and Investment Mission to the Republic of Korea, including a carbon capture storage project by POSCO Holdings and an undisclosed project from Lotte Fine Chemical. South Korean chemical company OCI Holdings announced in April this year the opening of a regional HQ in Kuala Lumpur (KL), with an investment in Serawak to make polysilicon for the solar PV market.

Malaysia’s goal to become the first choice for FDI in specialty chemicals in the region is a direct challenge to Singapore, currently occupying the first position. However, the two neighbors can both generate more investment by collaborating. Malaysia and Singapore are working on a Johor-Singapore Special Economic Zone (JS-SEZ), better integrating the Southern state of Malaysia with its neighbor across the bridge. That would allow investors in either country to tap into Singapore’s strong financial capabilities and Malaysia’s land availability and lower-cost workforce, at the same time. Both countries have access to one of the most vital shipping channels in the world, the Straits of Malacca. 

“The JS-SEZ is expected to ride on the strong growth of Johor and significant investments in the region by Singapore. Johor recorded RM70.6 billion worth of investments in 2022 alone, across various sectors including E&E, medical equipment, food manufacturing and data centers. Singapore was Johor’s second-largest foreign investor from January to June 2022, and contributed to around 70% of Johor’s total FDI in the manufacturing sector,” Tengku Zafrul Tengku Abdul Aziz, Minister of Investment, Trade and Industry (MITI) told GBR.

Finally, to attract investment in higher-tech sectors, Malaysia must not ignore the ABCs – infrastructure, talent, and, from a futureproofing perspective, a strong sustainability framework. The country’s economy did not meet the 2023 growth target of 4-5%, recording 3.7%, due mostly to its vulnerability to demand in the electronics global market. Nevertheless, the economy is sturdy, real wages have continued to grow while unemployment is in check, supporting strong household consumption. Both national and corporate debt have dropped. Declining oil revenues left the national budget with little room for maneuver, but the phase-out of subsidies across multiple product classes, including fuels, is continuing, which should free up cash for reinvestment and reducing debt, in turn helping the Malaysian ringgit recover from its current slump. 

Malaysia is, at least from a policy perspective, on the right path to increase its share in the specialty chemicals sector and play a bigger role in the international markets, where it currently only contributes to 1.1% of global chemical-derived exports by value, after Thailand (1.6%) and Singapore (2.2%), according to the Chemical Industry Roadmap figures. To play in the higher leagues of specialty production, it will need to make sure it carries through and stays consistent with its multiple policies. Competition will be fierce, with more countries in the region also wanting to climb the ranks.