Citizen backlash keeps Malaysia rare earth plant on hold By Siva Sithraputhran GEBENG, Malaysia (Reuters) - The expensive machinery lies silent, idling as Malaysia's government weighs a delicate decision to allow shipments of raw material to arrive from Australia and finally start operations at the world's largest rare earths plant outside China. At the industrial estate on the country's east coast, 20 or so protesters gathered in the searing afternoon heat have begun a chant. No to Lynas. Lynas go home!. The handful of demonstrators seems an unlikely obstacle to plans by Australia's Lynas Corp to build its company-making 2.5 billion ringgit ($800 million) plant, seen as crucial to challenging China's near monopoly on the production of rare earths, used in items ranging from smartphones to smart bombs. But the expanding protest movement they represent, feeding off broader frustrations with Malaysia's government as elections loom, has already delayed the project by eight months and cast a shadow over its future. The resistance - fed by social networks and Malaysia's increasingly lively independent online media - also raises broader questions over the global expansion of an industry that has created huge environmental problems in China, which currently accounts for about 95 percent of global supply. Western countries don't want it. Why should we in Malaysia?," said Norizan Mokhtar, who lives less than 10 km (6 miles) from the plant in the industrial area of Gebeng, close to fishing villages and Kuantan, a city of half a million people. My youngest is six, the effects might not be seen now but in the future. We eat fish every day, what if there is radiation? She's afraid controls on the plant will become slack after the first few years. Lynas has been plagued by delays and controversy in Malaysia since it broke ground on the plant two years ago with the aim of easing China's grip on the supply of rare earths and capitalizing on rising prices for the material. Its share price has halved since early last year as investors worry that it will lose out in the race to feed surging world demand. Lynas has orders covering its first 10 years of production. Japan, the world's biggest consumer of rare earths, is counting on Lynas to supply 8,500 tonnes a year by early 2013. "Our customers are waiting," Mashal Ahmad, the managing director of the Lynas plant, told reporters during a tour of the plant for media last month. "We have nothing to hide," he said, adding that "too much misinformation" had been spread about the company. Prized for their magnetism, luminescence and strength, world consumption of rare earths is estimated to rise to around 185,000 tonnes a year by 2015, from 136,000 tonnes in 2010. China imposed export quotas in 2009 to fight pollution caused by illegal mining and processing, turning up the pressure to find alternative sources. The Lynas plant is one of a handful under construction. It is 98 percent complete and would supply about 11,000 tonnes in its first year, eventually rising to 22,000 tonnes. Elsewhere, Canada's Great Western Minerals is teaming up with a Chinese group to build a rare earth processing plant in South Africa, while U.S. firm Molycorp is set to churn out just under 20,000 metric tons of rare earth oxide this year at its site near California's Death Valley. The Malaysian protest movement gathered strength last year after allegations - denied by Lynas - that it was cutting corners on safety, fanning fears that radioactive run-off from waste material stored at the plant could seep into the local water system after being chemically treated. An estimated 8,000 people rallied against Lynas in Kuantan in February and the issue has been seized on by the country's opposition to show the government is out of touch with citizens' concerns. Malaysia's government at first showed few signs of heeding the protesters' concerns, but it appears to have been caught off-guard this year by the strength of opposition to the plant as it prepares for a closely run election within months. Pahang, the state where the plant is being built, is a key stronghold for the long-ruling Barisan Nasional coalition that it can ill-afford to lose. Responding to lobbying by citizens' groups, the government set up a parliamentary select committee in March to look into the safety of the plant, after halting a conditional temporary operating license granted in February. A decision is expected after the committee presents its findings at the end of June. Prime Minister Najib Razak has vowed the government will not allow Lynas to operate the plant if there is any doubt over its safety. But he must also weigh the costs of sending a negative signal to foreign investors as he tries to reinvigorate the economy of the Southeast Asian country. "We will never compromise the safety of the people and the environment," he said in a radio broadcast last month. Lynas officials say they are confident the plant will win approval in coming months. Opponents suspect the government is waiting until after the election to approve the plant at a less sensitive time. "The timing could be all too convenient," said Fuziah Salleh, a local opposition member of parliament who has thrown her weight behind the protest movement. Basically it is a delay tactic until approval. Fuziah and leaders of the protest movement "Stop Lynas, Save Malaysia" say they will continue to fight against Lynas in the court if it wins approval, signaling more uncertainty ahead. The opposition - which made historic gains in 2008 polls and has an outside chance of winning the next election - has said it will scrap the Lynas project altogether if it takes government. Opponents say the Lynas plant doesn't meet with best practice standards for the industry as it is too close to heavily populated areas and in a place where the ground water level is high. Molycorp's plant in California, by comparison, is situated far from residential areas in an arid climate. There never was any public consultation before the building of the plant got underway. I faced resistance from the start," said Fuziah. If the protesters' views are trenchant, then Lynas' resolve is also hardening. The company has started legal action against a Malaysian news portal and a protest group for defamation. Rare earths have a tainted history in Malaysia. In 1992, a unit of Mitsubishi Corp closed a rare earths plant in Bukit Merah in Perak state amid acrimony over radioactive contamination. Residents of Bukit Merah say they have suffered a high numbers of birth defects and leukemia. Lynas says comparisons with Bukit Merah are unfair because the raw material there was over 40 times more radioactive than the concentrate to be used at its plant. It says commercial - not environmental - reasons brought it to Malaysia, where the government has granted the company "pioneer" status, giving it a 10-year tax holiday. Lynas says it has added earthen fill to the site for the storage facility to double the distance between waste products and the water table to 4.1 meters (14 feet). The waste will contain low levels of thorium, a radioactive chemical which can cause cancer, but the concentration of thorium is very low and stays low, it says. But it isn't clear how long the waste matter will be stored at the plant. Lynas says its storage facility has been built to a standard that would allow the waste to be stored permanently, although it only expects storage for 17 or 18 years. It hopes to sell the waste as a base for road construction after reducing its radioactivity concentration to safe levels. Treated waste water from the plant will go into the Balok river at an average rate of 213 cubic meters (7500 cubic feet) per hour, raising concerns about the impact on marine life and on the livelihoods of the fishermen along the coast. Officials at Lynas say the concerns are unfounded and the discharged water will meet with Malaysian regulations. From her perch close to the Balok river, Kak Su, who sells the daily catch local fishermen bring in, smiles quietly. She is resigned to her fate. "The government will decide, I don't think they'll make a bad decision," she says. "I don't think the protesters will get anywhere," she adds. Editing by Stuart Grudgings and Richard Pullin