BHP PREVIEWS SCUTTLING OF CHINESE INVESTMENT

1. (C/NF) According to its CEO Marius Kloppers, BHP Billiton
played a role in quashing Chinalco's bid to invest $19.5
billion in Rio Tinto. This meeting took place one day prior
to Rio Tinto's decision to walk away from the Chinalco deal
(septel from Embassy). BHP, however, still has its eye on
acquiring some of Rio's assets and believes the stars may be
aligning. Kloppers says Australia does not have a clear
"China policy," but appears to have drawn a line in the sand
against foreign ownership of the largest Australian firms.
BHP Billiton and China will still be bedfellows for the
foreseeable future, but the union is at times tumultuous.
End Summary.

Rio Tinto Still in BHP's Crosshairs


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2. (C/NF) During a June 4 meeting in his Melbourne
headquarters, BHP Billiton CEO Marius Kloppers told Consul
General that his firm had taken steps to derail Chinese
state-owned Chinalco's $US 19.5 ($A 23.9) billion investment
in Rio Tinto. (Note: Various open source reports have
described BHP's vigorous lobbying efforts in Canberra against
the Chinalco/Rio Tinto deal. End note.) Hours after the
meeting, press reports indicated that Rio Tinto caved into
shareholder concerns about Chinese influence and walked away
from the deal (see septel from Embassy for more detail). BHP
Billiton, however, still has its eye on acquiring choice Rio
Tinto assets and now maintains significantly higher cash
reserves than it did last fall when the acquisition of Rio
Tinto fell through. In addition, South-African born Kloppers
who describes himself as only nominally Australian, believes
that Rio Tinto's new chairman, Jan du Plessis (also a South
African) is more amenable to a potential deal with BHP
Billiton. Finally, he attributed the failure of the last
attempt to financing woes and hinted that the environment
today would be more conducive to an acquisition of Rio Tinto
(and its $US 38 billion in debt).



3. (C/NF) Despite Chinalco's late May announcement that it
would restructure its investment deal with Rio Tinto to allay
GOA concerns about the perceived Chinese influence on Rio
Tinto, Kloppers confidently predicted on June 4 that the deal
would fall through. Clearly frustrated, Kloppers noted that
doing business in Melbourne is like "playing poker when
everyone can see your cards." He complained that Chinese and
industrial (Rio Tinto) surveillance is abundant and went so
far as to ask Consul General several times about his insights
into Chinese intentions, offering to trade confidences.
Kloppers even hinted about privacy concerns vis-a-vis the GOA.

Does Australia Have a China Policy?


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4. (C/NF) Similar to what we have heard from other observers,
Kloppers does not believe that Australia has a well defined
China policy. He believes that Australia would like to build
up trade with China, but there is a "real fear" of the
Chinese government. "Australia does not want to become an
open pit in the southernmost province of China," he added.
Kloppers thinks the GOA is drawing a line in the sand to keep
Chinese-state owned firms from owning the larger mining
companies such as Rio Tinto, BHP Billiton and Woodside. He
added that the GOA would be relieved if they did not have to
turn down the Chinalco/Rio Tinto deal. He also believes
Chinese state-owned firms would encounter heavy resistance
should they make overtures at Australia's telecommunications
and banking giants.

The Future with China


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5. (C/NF) While he acknowledged there is potential to do more
business with India, particularly on energy-sources, Kloppers
was focused on China. Approximately 20 percent of BHP's book
of business is dependent on China; this is up from only 3.6
percent in 2001. India presently accounts for 4.5 percent of
BHP's business. He acknowledged some difficulty in working
with the Chinese, but he appeared optimistic that BHP would
eventually get their Chinese customers to move away from
contract based pricing on iron ore and inch toward a system
where the market sets prices. Already, there is support for
this among Chinese factory managers who "routinely" find

MELBOURNE 00000066 002.4 OF 002


exceptions to marching orders on pricing handed down by
Beijing. Kloppers believes the Chinese will build 200-300
nuclear power plants over the next 10-15 years and that this
increase would be necessary to justify expanding the Olympic
Dam uranium mine in South Australia to full capacity.

Bearish Thoughts on the Australian Economy


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6. (C/NF) Kloppers said the Australian stock market is due
very soon for a correction. He does not see improvements in
real world economic conditions. Recent rallies in global
stock prices have been buoyed by "artificial optimism." Debt
loads are still high; they have only been shifted off of
corporate balance sheets onto government ones. Kloppers'
baseline assumption is that the Australian and global
economies will recover, albeit slowly. He rejected the idea
of a "V-shaped" recession and believes that it will instead
look more like an "L." Kloppers described Australia's Carbon
Pollution Reduction Scheme (CPRS) as a "tax on exports" and
said that the more reasonable approach to the problem of
reducing emissions was a multi-faceted solution including
solar, reforestation and a re-examination of nuclear power.

Comment


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7. (C/NF) Kloppers appeared to be an uneasy bedfellow with
the Chinese. He recognizes the need to remain cozy with one
of his largest customers, but he is frustrated by Chinese
practices such as rallying customers into trust-like blocs,
forcing him to write one-sided options, and regularly
"squeezing through contract loopholes." On the other hand,
he was upbeat because he clearly sees an opportunity to
purchase some of Rio Tinto's more lucrative assets even if
they decide to not pursue an outright purchase (septel from
Embassy). BHP sees a substantial opportunity with Chinalco
out of the way and Sinophobia waxing among Rio's shareholders
and among many Australians.

THURSTON