In dramatic fashion, Mr. Market took Rayonier (RYAM) to the woodshed over the last two days. The beating reduced RYAM's market cap by about 50%, or over $300 million. The reason: RYAM's largest customer is trying to get out of a fixed-price contract that doesn't end until 2018. What I find interesting is that this money that disappeared from Rayonier's market cap should show up somewhere else, but it doesn't!
Rayonier's loss is someone else's gain. Either RYAM's customer benefits by getting a lower price or RYAM's competitor benefits by getting more volume, or some combination. But the shares of the customer (Eastman Chemical) also fell! As did the shares of the competitor (Bracell). Bracell seems to be the best guess as to the competitor that is causing Eastman to reconsider its relationship with RYAM.
So how does this make sense? I'm not sure it does. Maybe the market is implying that the lawsuits that will go back and forth over this contract result in only the lawyers winning? Perhaps there is another competitor out there, perhaps a private one, that will reap all the gains? Any other ideas?
Meanwhile Bracell (1768) looks like an enticing investment. It is the low-cost operator in the industry, benefiting from a weak currency (as it is based in Brazil). It recently reported a profit of $32 million in the first six months of the year, a book value of $1.1 billion, and yet it trades for a lousy $370 million (or 3 billion HKD, as it trades in Hong Kong).
This is a pretty good write-up on the company: http://seekingalpha.com/article/3100406-bracell-recent-divestiture-of-a-commodity-business-unlocks-deep-value-opportunity?ifp=0
The market is pretty pessimistic on this industry as over-capacity is hurting prices. But as the companies cut back on expansion, I would expect demand will eventually catch up with supply. Buying the suppliers when the market is pessimistic is usually a good way to go.
Disclosure: Long Bracell