Despite some silly protestations over at Catallaxy I think Peter Costello is quite right to oppose the deal by Chinalco to purchase key Rio Tinto assets. BHP-Billiton, for a time, valued Rio Tinto shares at somewhere north of 3.4 times the value of BHP-Billiton script. They are now trading at about 1.6 times a BHP-Billiton share. There are two observations consistent with these findings. First, that BHP-Billiton vastly overvalued RioTinto stock because it ignored the boom-inflated valuation placed on Rio's disasterous move into Alcan - so much so that, on this basis at least, the whole BHP-Billiton board should be sacked. (The Rio board should unequivocally be sacked for rejecting the BHP-Billiton offer!). If Rio had accepted the BHP-Billiton offer the latter would have lost about $100 billion in market value by now. Second - and this is only a partially contrary view - is that, while things were good, BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consummate a marriage with Rio and that this alone was worth a vast premium. Both views have an element of sense.
Australia will be a major resource supplier to China for the indefinite future. The assets Rio is seeking to flog to the Chinese provide a sale in Rio's interest but not in the interests of Australians since this sale will reduce Australian price-setting power in these markets. The counterargument that Australian interests have incentives to bid a premium for Rio is logically correct (the existence of a global deadweight loss means the Chinese consumers lose more than Australians gain) but is misleading given the liquidity-constrained Australian capital market environment and the existence of bottom feeding Chinese carnivores supported by their state funding. Furthermore assets are not trading currently at their value.
Look at Futuris which yesterday sold 19.9% of the Australian Agricultural Company for $1-70 a share when the asset backing of AAC is more like $2-74. Futuris needed the dough presumably to remain solvent. It is a bottom-feeding bonanza out there. Sometimes one cannot prevent national interest losses - othertimes one can.
Keep crucial Australian assets that have the potential to yield excess returns for 100 years out of the hands of those who will consume these assets. This isn't protectionism as some in the blogosphere contend. It arises because a country with monopoly power in trading certain resources does not wish to sell the assets giving rise to these resources for a song at an all time trough in the business cycle to those whose interest it is to destroy Australian price-setting power. Stop the sale.