Rayonier (NYSE:RYN) is investing several hundred million dollars through 2013 to expand manufacturing capacity in the company's Cellulose Specialties product line. This extra capacity will come at the expense of the Absorbent Materials business, which the company plans to exit.

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Performance Fibers
The Performance Fibers business is the company's largest business segment, and generated sales of $255.5 million in the quarter ending September 30. This represented 66% of the company's total sales for the quarter.

Rayonier owns and operates two facilities in the Performance Fibers business. The company's largest mill is in Jesup, Georgia, and has a capacity of 580,000 metric tons. The second mill is in Fernandina Beach, Florida, and has capacity of 160,000 metric tons.

The Performance Fibers segment comprises two product lines. In the Cellulose Specialties business, Rayonier produces higher end fibers that are used as raw materials in many different products, including cigarette filters, pharmaceuticals, cosmetics, tires, packaging and plastics.

The Absorbent Materials business makes fluff fibers used as absorbent materials in diapers, feminine hygiene products, industrial towels and other products. This product line is considered a lower end type of business. (For related reading on manufacturing, see Vital Link: Manufacturing And Economic Recovery.)

Rayonier is planning to invest $300 million from 2011 to 2013 to convert the company's existing Absorbent Materials capacity to produce Cellulose Specialties. This expansion will add an extra 190,000 metric tons of annual capacity in this product line, and eliminate all of Rayonier's Absorbent Materials capacity.

Rayonier prefers the market dynamics in the Cellulose Specialties business, and expects steady growth here over the next five years. The company estimates that worldwide demand will increase from the 2010 level of 1.4 million metric tons to 1.73 million tons by 2016.

Rayonier has good pricing power in this product line and has seen five straight years of increased pricing. The company is currently negotiating contracts with customers for 2012 and expects to release more details during the fourth quarter earnings conference call.

One company that competes with Rayonier in the Cellulose Specialties market is Buckeye Technologies (NYSE:BKI). The company is the second largest producer with volume of 180,000 tons in 2010.

Customer Concentration
One risk for Rayonier in the Performance Fibers business is the company's dependence on several large customers for a significant portion of revenue. In 2010, Eastman Chemical Company (NYSE:EMN) and Celanese (NYSE:CE) generated 20 and 15% of the Rayonier's sales in this business segment, respectively.

The Bottom Line
Rayonier is adding capacity to manufacture products that generate a higher return than other product lines, a logical strategy that makes sense. One can only hope that the market for these types of fibers is still favorable in 2013, when the extra capacity comes on line. (For related reading, see Cyclical Versus Non-Cyclical Stocks.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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