Trading on Tariffs

You gotta love it when the Commerce Department puts a tariff on Chinese paper, and the former treasury secretary's private-equity firm owns a company that makes the same product Stateside...but that's just what happened. Oddly enough, that ended up helping one little paper company from South Africa.

Coated freesheet is the glossy paper used in magazines and catalogues. And Sappi, while from South Africa, also happens to be the largest coated-paper maker in the U.S. - and almost all the other paper-making companies in America are private. And since Sappi has been getting killed by cheap Chinese imports, the tariff – if it goes through on June 13 – could give the company a much-needed bump, at least in the short term.

Sappi represents around 10% of the global coated paper market, and coated paper is roughly 70% of its sales. The U.S. market makes up about 29% of its sales, and as we just said, China has been devouring their market share. They’ve been getting killed by cheap Chinese imports.

Cramer’s not saying the tariffs are good in any way. They’re just a useful way for you to make money in one stock. The imports have been meeting the U.S.’s huge, unmet demand for coated freesheet paper at lower prices. Also of note, there’s an upcoming decision on whether the U.S. should apply anti-dumping duties, basically more tariffs, on South Korean and Chinese coated paper – that’s coming in May. If the U.S. does decide to apply the duties, the price of Asian paper goes higher, and Sappi becomes even more competitive.

Make no mistake here, though, Sappi is a trade, not an investment. Cramer says it’s a play on the short-term effects of the anti-subsidy and anti-dumping tariffs, which could lead to a more sustainable recovery in the overall paper market – but might not. Over the long term, this South African paper play just can’t compete with China.

As a short-term trade though, it’s got a lot going for it, Cramer thinks. Not just the tariffs, but also the weakening of the South African rand currency should help Sappi’s other businesses. Most of the company’s revenues are denominated in dollars, but its expenses are in rands, which means any depreciation in the rand should improve profit margins here in America.

Bottom Line: Go give John Snow a hug. In his pursuit of profits for his private equity firm, he accidentally created a great trade for the rest of us in Sappi. If only this guy had gotten out of the treasury sooner, Cramer says we might have seen a lot more of these trades.

Questions? Comments?