China buys, Woolworth passes inflation onto consumer

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Nationalised conglomerate China Metallurgical Group (CMG) is forking out AU$400 million for an Australian iron project. The guy on the other side of the deal? Cape Lambert Iron Ore (ASX:CFE).

Cape Lambert is worth 50 cents per share. What CMG is offering amounts to around 90 cents per share. Yet investors did nothing. Why, investors?

The deal is subject to due diligence, and approval from our own government. But stingy Cape Lambert owners have valued the deal at practically zero. The shares are up two cents on the company’s price before the announcement.

The Australian dollars China is willing to pay are getting more expensive. Our currency is worth over US93 cents this morning, a three-month high. Traders are still working the interest rate angle. US rates are falling. Australian rates are building. Cash is departing the shores of the home of the brave, and setting sail for the lucky country.

Woolworths (ASX:WOW) has extended its lead in the supermarket wars with Coles, reporting another huge jump in profits driven by lower costs and greater supply chain efficiencies,” reports Stephen McMahon in today’s Herald Sun.

Lower costs? But aren’t those things going up?

Bravo, Woolworths. You have cut expenses in an inflationary environment. If you can keep that up, we’ll be doubly impressed. The company added 28% to its half-year bottom line. It sounds like Woolworths’ managers are doing something right.

“Something right” might just mean they’re passing rising food prices on to customers.

If so, it’s an issue the directors will need to deal with. If food prices continue rising, there’ll be a point at which they can no longer handball the losses. The guy who pays can only tolerate so much. Then he picks up his ball and goes home. Yep… customers own the ball in this case.

The problem remains even if Woolworths has been cutting costs in other areas. How long can it tighten its belt? We guess we’ll find out.

Al Robinson
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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