Zheng Wenrong Secretary General of China Association of Natural Rubber

1. Innovation in the New Normal Solidify the Natural Rubber Industry in China to Promote Development Zheng Wenrong Secretary General of China Association of Natural Rubber

2. Ladies and Gentlemen： It is my great pleasure today to have the honor to be present in the Shanghai Derivatives Market Forum (SDMF) again. I’d first like to bring the best wishes of China Association of Natural Rubber and the Chairman Mr. Yang Shaopin for the success of this forum.The forum has been held successfully for eleven sessions. And it has played an important part in promoting healthy growth of China's futures market and the development of finance, metal, energy and rubber industries. Its leading role and tremendous contributions to the upgrade of natural rubber industry have been highly recognized by the leaders at all levels and industry players. I would like to take this opportunity to extend my heartfelt gratitude to the leaders and employees of Shanghai Futures Exchange as well as professionals and consumers in the natural rubber futures sector for their support in the development of China's natural rubber industry!

3. At present, with the rubber price even below the cost, many plant rubber areas have become wavered from the development of the industry. Malaysia, Indonesia, India and other major rubber producers have started to reduce production. And it is quite common to stop harvesting, and even replant other crops in many rubber production areas in China. More then 5000 employees of Haijiao Group have turned away from the industry. Many private enterprises have ceased rubber harvesting, and private-owned rubber planting areas alone have abandoned nearly 50 thousand Mu in Banna, Yunnan. Baoting county in Hainan province that is known as a major rubber producer has lost confidence in rubber production and began to convert the rubber plantation to fruit garden. The natural rubber represents one of the most important industrial raw materials and global strategic resources. As the largest consumer and importer in the world, China features a high dependence on natural rubber. It is important to actively protect and develop China's natural rubber industry (With large population and total development needs, it is necessary for China to reserve resources, especially biological resources in addition to the physical resources reserve).

4. Based on the existing problems in China's natural rubber industry and possible solutions in response to the rubber price situation, adapt to the new normal of economic development and consolidate and develop China's natural rubber industry, I will discuss the following two topics with all of you: II. Innovative thinking, adaption to the new normal, consolidate the natural rubber industry in China, to improve the level of development (counter-strategies). I. The main problem in natural rubber industry

5. (I) The external problems 1. Insufficient supply From a global perspective, the main problem lies in the fast growing pace of rubber plantation. According to relevant statistics, the acreage of rubber planting has increased by at least 56 million acre from 2005 to 2014 around the world, with an average YOY growth of 5.6 million. Taking into account the existing plantations established a few years ago, the increased acreage from 2011 is more than 6 million on a YOY basis (an increased production of 0.36 mmt based on an initial yield of 60 kg per acre). Along with the natural production increase from existing plantations that have been put into production, the YOY increase of rubber production is more than 0.6 mmt. Compared with 2005, the annual production of natural rubber have increased by more than 2.4 mmt as of 2014. Deteriorated by weaker consumption demand as a result of financial crisis, the oversupply and insufficient demand have induced the plummet of rubber price in recent years. I. The main problems in natural rubber industry

6. 2.The effect of international economic climate In addition to the excessive production increase and oversupply as a result of fast growing rubber plantations stimulated by the rise of rubber prices a few years back, the global economic crisis and slowing growth pace further contributes to the current depression of natural rubber industry. Especially for China as a large consumer of material resources, the continuous decrease of economic growth from double-digit to single-digit figures leads to a constant drop in demands for various resources. The grain market, soybean market, cotton market, steel market, cement market and rubber market have been undergoing gloomy depression since 2012, and the national reserves have reached the upper limits as a result of vigorous procurement by government to safeguard of interests of farmers.China began to implement Target Price Program (TPP) on grains, pulses and cotton on a trial basis since last year, and provide subsidies to producers based on production costs. Despite the current signs of a positive turn in the world’s economy, the economic growth of developed countries in Europe and BRICS countries remain slow. Russia suffers from negative growth because of the declining oil price. The GDP growth in China is not ideal in the first quarter, with a drop in both import and export values, and the depression of natural rubber price becomes a new normal. I. The main problems in natural rubber industry

7. 3. National supporting policies fail to cover the entire natural rubber industry At present, aside from adopting import tariff protection measures which make downstream industries unhappy, reserving the investment of infrastructure appropriation which has been assigned to agricultural reclamation rubber planting areas in 1980s(less than 30 yuan per Mu), providing duty free policy for agriculture production and implementing subsidy system of good natural rubber (2 yuan each tree and the procedures are complicated), there are no fundamental measures, while the existing supporting policies coverage of existing rubber is small, the number is limited. In addition, along with rising costs of production materials and labor costs. China’s support for the natural rubber industry is obviously insufficient. I. The main problems in natural rubber industry

8. 4. There are many uncertainties in natural rubber production and margin due to different natural disasters I. The main problems in natural rubber industry Firstly, the rubber planting areas in Coastal regions, such as Hainan island and Leizhou Peninsula in Guangdong, frequently Suffer from typhoon and cool snap. The rubber planting areas subject to frequent wind, cold weather, disease and pests in China have an average loss ratio of more than 15%. Secondly, according to the theory that the rubber trees will stop growing when the temperature is under 15°C,the growing period of Chinese rubber trees is 2-3 months less than other tropical areas. The growing speed is compromised, non-production period is longer and more input is required. The rubber harvesting time each year is 75-90 days less compared with other rubber planting countries. The unfolding of potential of rubber planting is compromised, the production cost is higher. With the current price, it needs dry rubber of 19000-21000 yuan per ton in agricultural reclamation rubber planting areas and more than 15000 yuan in privately operated rubber planting areas. Thirdly, most rubber planting areas are located in mountainous regions with an altitude of 600-800 meters, where terraces construction road construction and shelter forest are required to plant rubber trees, which will not only increase the intensity of labor but also contribute to higher production investment and costs. It has a strong impact on potential of rubber production and economy benefit.

9. (II) The internal problems 1.Rapidly rising rubber harvesting costs Apart from the high production cost due to climate and environment, another major problem is the fast growing labor cost of harvesting rubber. At present, labor cost makes up more than 60% of total cost (as compared to 30% a few years back), the daily salary of employees is more than 150 Yuan, with a yearly labor costs of more than 40 thousands Yuan. Based on the assumption that each farmer harvests an average area of 30 Mu, and the annual yield of dry rubber production is 100 kg per Mu, the annual production of dry rubber is about 3 tons per person. Now, the rubber price is 13000 Yuan per ton and the income is only 39000 Yuan. A higher rubber production leads to a greater loss. Therefore, rubber harvesting suffers from labor shortage this year. I. The main problems in natural rubber industry

10. 2.Low degree of mechanization of rubber planting The mechanization of rubber production in field is low. Apart from transportation, most operations are manually performed, especially rubber harvesting that requires not only long working hours but also protection measures against theft and high technical requirements. Coupled with strong labor intensity, most people prefer paying high salary to employ the professionals over completing the tasks on their own, which further contributes to higher labor cost and greater labor shortage. I. The main problems in natural rubber industry

11. 3.Inadequate innovation and significant gap between existing rubber products and modern product requirements. The traditional full latex is still the dominant rubber products in China. But the tire industry which makes up 80% of rubber consumption mainly use NO.20 standard rubber. The full latex in the market of tire industry is limited and it’s competitiveness is difficult to increase. In addition, because of decentralized management, the resources of rubber latex raw materials of original product factory are sourced from different channels with inconsistent qualities and specifications: some with stimulator, some with raw rubber, some placed for long time, some placed short time, some with ammonification preservation, some without preservation. There is a gap between the existing products and modern products requirements, which is one of important factors that limit the competitiveness of domestic rubber products in China. I. The main problems in natural rubber industry

12. 4.Science and technology support funds are insufficient, the application of scientific and technological achievements is limited The rubber tree is a plant whose growth cycle lasts for decades. It requires a long time to conduct adaptive technological test. Because of the limited subsidies, many enterprises and contractors are unwilling to undertake the tasks of pilot test objects. Moreover, the technological achievements applied to production for many years and even routine measures are insufficiently performed in recent years, which leads to frequent occurrence of bark damage of rubber tree and cold epidemic. According to relevant statistics, the rubber trees unable to produce rubber because of bark damage make up more than 20% (equal to more than one million acres) in rubber plantations which has been put into production for more than 10 years. And it rises at the rate of 2--3% (equal to 100 thousands –150 thousands acres) each year. At present, because of low application degree of science and technology in China, the decrease of rubber production has reached 100 thousands tons at least every year if meet the cold disease, which has a strong impact on rubber planting margins. I. The main problems in natural rubber industry

13. 5.Many rubber planting areas are still in the state of decentralized operation Through the deepening reform over recent years, the Hainan and Guangdong rubber planting areas have incorporated natural rubber industry companies, which set an example for the improvement of modern enterprises system. However, the natural rubber industry in China is operated based on household production for both state-owned or private enterprises, leading to common issues including small production scale, gap in terms of technique and management, poor result of decentralized pest and disease control effect and low production efficiency, which contributes to higher production costs. I. The main problems in natural rubber industry

14. 6 .Slow progress of One Belt and One Road policy in development of overseas rubber planting industry At present, there are more than 150 Chinese enterprises in the countries and regions along the “One Belt and One Road” economic belt. There are nearly 100 alternative growing enterprises in Yunnan alone. The rubber planting acreage is more than 1.5 million acres. Establishing or holding more than 20 natural rubber initial processing factories. The production ability has reached million tons. However, the self-controlled natural rubber production of domestic enterprises is less than 200 thousands tons, which account for only 4.75% of import amount in China. The main problems:1. The investment of policy is absent 2. The products back to China can enjoy national treatments. 3. Extravert professional talents are insufficient. As a result, the pressure of capital operation of overseas rubber planting industry is high, the production input is decreased, the development is difficult and the enthusiasm of overseas rubber planting is frustrated. I. The main problems in natural rubber industry

15. 7. Insufficient communication between upstream and downstream Lacking communication and exchange. Many raw material producers do not quite understand requirements of product producers. The raw materials produced with traditional process can hardly be accepted by product producers who would make a deal only after rounds of bargains. Raw materials producers and product producers look in different ways as to the development of domestic rubber industry. The former urges the government to protect the industry with import tariff which is exactly what the latter tries to lobby the authorities to reduce or even cancel. (Excessive compounded rubber import with zero tariff is part of the problem and impacts domestic market seriously.) I. The main problems in natural rubber industry

16. The coordination mechanism is far from being perfect. Producing and selling each belongs to different sectors for quite a long time. Approval process required when the two need to cooperate in public relation or important activities is tedious. For decades, except that the upstream requires the downstream to test the new raw materials, the raw materials for new product trial are generally imported. For example, Shandong accounts for 40% of domestic rubber consumption. However, 80% of local rubber product factories do not even know that natural rubber can be produced domestically, let alone domestic brands. It is one of the key factors that lead to the shrinkage of market footprint and damper the development enthusiasm of domestic producers. I would not elaborate on other aspects such as communication and trade patterns here. I. The main problems in natural rubber industry

17. 1.Forge a better industry environment China has formulated and promulgated measures and policies to deal with the current situation of the industry since last year, e.g.: (1) The import tariff of dry rubber has been lifted from RMB 1200 Yuan to RMB 1500 Yuan per ton since January this year and the import tariff of natural concentrated latex has lifted from RMB 720 Yuan to RMB 900 Yuan per ton. (2) Formulate the Technical Manual of Compound Rubber which regulates that the raw rubber amount is less than 88%. With this, the impact of imported compound rubber to domestic rubber has been alleviated. (3) Local banks implemented control measures of mortgage loan. The amount of mortgage loan with imported natural rubber has declined significantly II. Innovation in thenew normal topromote development (countermeasures)

18. With the roll-out of “One Belt and One Road” strategy, China not only improves the positioning of domestic natural rubber industry, but also puts forward new requirements: (1). Make it clear that the natural rubber plays a key role in assuring national security, (2). Urge national departments concerned to provide more support in order to guarantee the sustainable development of the industry. 1. Research has been done on the trial of subsidy system of target price of natural rubber industry. Allowance would be provided to rubber farmers if the market sale price is lower than the natural rubber cost. 2. More rubber production capacity will be built and research on the construction of core rubber garden has been carried out in order to satisfy the domestic market demand. II. Innovation in thenew normal topromote development (countermeasures)

19. 3. Discussions are held by national authorities concerned on the establishment of development fund of natural rubber industry and investment will be provided to domestic production enterprises and rubber farmers. 4. According to the requirements of “One Belt and One Road” strategy, Ministry of Commerce and other relevant authorities are formulating the development plans of overseas rubber planting industry. The plans includes that the natural rubber of foreign invested or Chinese holding enterprises should be treated as domestic producers. The tariff and value-added tax will be returned in full and support will be provided according to the amount of self-produced natural rubber of overseas China holding enterprises or the methods of exempting from imported tariff quota. II. Innovation in thenew normal topromote development (countermeasures)

20. 2. Fine-tune the domestic farming system II. Innovation in thenew normal topromote development (countermeasures) （1）Fine-tune farming system to cope with tough status quo. Haijiao Group has implemented process like dedicated management, grinding,, harvesting, procurement and transport in order to relieves rubber worker shortage. （2）Strengthen upgrading low-yielding rubber gardens （3）Delay the cutting, rotate rubber production and cultivate trees by stopping production.

21. 3. Promote the industry upgrade by scientific rubber planting In view of problems we have, the following should be done to adapt to the new normal: Firstly, impel the full adoption of industrial standards (such as rubber planting procedures, plant protection procedures, processing technical procedures, etc.), normalize production, and solidify technical supervision over the production. Secondly, promote implementation of technology applications including: enhance research and application of disease and pest control technologies, implement electronic telemetry and comprehensive control of the rubber garden pests, improve research and application of latex biological coagulation and preservation technologies, “three protections and one shield ” and other cultivation techniques of high yield, micro cutting and lead rubber technology, the grind-free rubber knife technology and power-driven rubber collection, and deep processing and fine processing of rubber, and build environment friendly planting and processing system. Professional training should be provided in the management, cultivation, and cutting technologies of rubber trees. In order to improve standardized cultivation, regulated management and scientific rubber collection. II. Innovation in thenew normal topromote development (countermeasures)

22. Thirdly, improve the construction of circulation system of natural rubber market II. Innovation in thenew normal topromote development (countermeasures) 1.The enterprises may leverage functions of the hedging, price discovery, risk control, guaranteed Profit in Shanghai Exchange, to improve capital turnover efficiency. The enterprises without good conditions should create conditions to enter the futures trading as soon as possible in order to avoid the trade risk. 2. Upgrade e-commerce technology, expand the electronic trading functions , and improve electronic trading methods. According to the innovation mechanism, adopting the methods of combination, coupling and alliance to formulate the unified professional market, increase the voice of price and avoid mutual suspicion In trading. Realizing the stable market, increasing the product competition, increasing industry revenue targets. Providing a good environment and trading opportunities to domestic and global providers. 3. Build information management system to include logistics, business flow, information flow, capital flow, building a system of information Management, supply chain of natural rubber industry and trading platform, increasing the resource macro control constantly.

23. IIInnovation in thenew normal topromote development (countermeasures) Fourthly, build and improve cooperation mechanism to promote level of organized. 1. Develop cooperation between production and marketing. According to the various development ways of production, purchase and sale and processing cooperation organization, it can realize cooperation service and scale operation of the production, technology, pests control, production material purchasing and product processing, overcome the limitation of small scale of farm familieseffectively. 2. Develop the stock cooperative business in the places with good conditions. Led by the proficient of production and management, processing enterprises or relevant social service organizations, attract rubber farmers to buy shares with rubber trees, and organize the professionals with the skills of natural rubber production and management to produce and manage specially. The rubber farmers can be divided according to the stocks. 3. According to the paid circulation of management right of rubber trees, improving the Management level of rubber garden and degree of production organization. Giving a assistance to solve production difficult of rubber farmers, promoting the employment income which transfers to other industry. Pushing the natural rubber industry to enter the track of positive sustainable development.

24. Fifthly, improve the product structure, expand the product application, assure high product quality. Further weed out or reform backward equipment and facilities of high energy consumption and high pollution, accelerate technical update, promote the overall level of initial processing of the natural rubber, improve the production efficiency, reduce production cost, expand the application and recognition of the products and improve product quality. Develop the new product with tremendous efforts, improving the product structure, build the special strategic products (military products, aerospace and navigation products) and brand products, improve the market competitiveness. The Haijiao Group has establish the innovation alliance of the natural rubber technique with the People‘s Liberation Army General Armaments Department, Zhonghua Group,Shuguang, Beijing, Shenyang and many state rubber research institutes, and with the Tsinghua University, China Tropical Agricultural Academy of Sciences , Fengshen Tire Factory and other more than 20 units. The alliance has developed the aviation rubber successfully and planted 2 million acre to produce rubber products for national key fields. II. Innovation in thenew normal topromote development (countermeasures)

25. Sixthly, innovate in the business theories and build modern enterprise system. Speed up the process of industrialization and large-scale production of natural rubber. Build awareness to cope with market risks in joint efforts. Proposed by the Bureau of Reclamation of the Ministry of Agriculture, the Head Bureau of Reclamation of Hainan, Yunnan, and Guangdong as well as the Rubber Research Institute of China Tropical Agricultural Academy of Sciences have established the China agricultural reclamation rubber manufacturer association. According to the agreement signed, a “coordinated, interdepartmental and integrated” strategy will be implemented to cultivate, in a “united, allied, and jointly operating” way, the agricultural reclamation international big rubber provider with market competitiveness, resource control and international influence. II. Innovation in thenew normal topromote development (countermeasures)

26. Seventhly, take the chance of “One Belt and One Road” strategy. Access the overseas natural rubber markets through recapitalization, merger, acquisition, M&A, or share holding. Leverage foreign high quality farming lands and advantageous climate conditions to improve supply of natural rubber resource gradually. Finally, I hope with roll-out of “One Belt and One Road” strategy, the establishment of AIIB and implementation of key measures for domestic economic recovery, the real estate, transportation, major infrastructure constructions would boom to drive the consumption of raw material products as well as development of the rubber market and promotion of domestic natural rubber industry. I believe that the rubber will greet a prosperous market in a certain time in the second half year. II. Innovation in thenew normal topromote development (countermeasures)

27. Thank you!