zheng wenrong secretary general of china association of natural rubber innovation in the new normal...

Zheng Wenrong Secretary General of China Association of Natural Rubber

Innovation in the New Normal Solidify the Natural Rubber Industry in China to

Promote Development

• 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!

• 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).

• 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

• (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

• 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.


• 3. National supporting policies fail to cover the entire natural rubber i

ndustry

• 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.


4. There are many uncertainties in natural rubber production and margin due to different

natural disasters


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.

• (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.


• 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.


• 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.


• 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.


• 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.


• 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.


• 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.)


• 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.


• 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 the new normal to promote development(countermeasures)

• 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.


• 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.


• 2. Fine-tune the domestic farming system


（ 3 ） Delay the cutting, rotate rubber production and cultivate trees by stopping production.

（ 2 ） Strengthen upgrading low-yielding rubber gardens

（ 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.

• 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.


• Thirdly, improve the construction of circulation system of natural rubber market


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.

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 families effectively. 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.

IIInnovation in the new normal to promote development(countermeasures)

• 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.


• 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.


• 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.


Thank you!