Glencore and Xstrata, which have yet to reach a deal, would together rank as the world's largest thermal coal exporter, the largest zinc producer and third-largest copper miner -- but would remain all but non-existant in iron ore mining.

Xstrata has an open desire to get into iron ore, underlined in 2009 by its attempt to buy mining giant AngloAmerican. But it has been thwarted by a scarcity of major new discoveries and a virtual oligopoly among mining giants Vale, Rio Tinto and BHP Billiton, which have no intention of loosening their grip, say industry players and analysts.

"With a fortified balance sheet thanks to Glencore, it's a logical move for Xstrata which should light a fire under the others, like Vale," said an Australian mining executive who asked not to be named.

Iron ore sells for around $140 a tonne to China, the world's top buyer of the steel-making commodity thanks to the mass urbanization underway there, and only costs about $20-$30 a tonne to mine.

Australia alone provides almost half of China's iron ore imports, with BHP Billiton, Rio Tinto and Fortescue Metals Group the main suppliers.

Xstrata is considering an all-share merger of equals with Glencore, which would leave the new entity with low enough gearing to fund a big push into iron ore, including possible acquisitions in competition with the likes of big miners Vale, Rio and BHP.

"They know they need to bulk up and bulk up real fast to close the gap on the top three. Iron ore is an obvious area," a resources banker said. He declined to be identified as he is not authorized to speak to the media.

"For starters they don't have a presence, so expect one bolt on to start with, followed by an audacious large one if the markets support one," the banker said.

For its part, Glencore's iron ore marketing business has soared since it was launched in 2008 and it has carved out a growing share of the market. [ID:nL5E7JP10K]

Last year was a boom for mining acquisitions -- $98 billion worth, the largest since 2007 -- but the Glencore-Xstrata deal, valued at $80 billion, would be the biggest since Rio Tinto bought Alcan in 2007.

"It makes sense because if you want to hit the industrialized commodity suite, you've really got to be across both the bulks and base metals," said Australia & New Zealand Bank analyst Mark Pervan.

In Australia's Pilbara iron belt, the holy grail of iron ore deposits due to its rich lodes, fast-growing miners such as Fortescue, Atlas Iron, BC Iron and Aquila Resources (AQA.AX> may be in their sights.

STIFF COMPETITION

Xstrata's stiffest competition for iron ore mines could come from Vale, the world's biggest iron ore producer, which mines hundreds of millions of tonnes in Brazil but has been looking for entry to the Australian sector to reduce shipping times to its main market, China.

Vale already operates in partnership with Aquila in coal mining and has been long-rumored to be interested in Aquila's as-yet undeveloped West Pilbara iron ore project. Aquila holds 50 percent of the project, which will cost an estimated $6 billion to develop. Privately held American Metals and Coal International owns the other 50 percent.

Competition may also come from China itself.

Steel makers in China have been scouring the globe for their own iron ore mines in South America, Africa and Australia, with third-biggest mill Wuhan Iron and Steel vowing to become self-sufficient by 2015.

Under a merged entity, Glencore's mines would have added 25 percent to Xstrata's operating profit in the first half of 2011.

The extra bulk might push the combined company firmly into the top league of global miners. Scale helps in mining as big global mining companies can more easily afford to take on the risks that come with huge investment projects.

If Xstrata's attempt to acquire AngloAmerican in 2009 had succeeded it would have immediately made the Swiss-based company number 5 in the highly profitable seaborne-traded global iron ore market.

But the collapse of merger talks with AngloAmerican left Xstrata with little in the way of iron ore holdings.

In 2011 it paid A$532 million for Mauritania iron ore prospector Sphere Minerals and owns 50 percent in the Zanaga iron ore prospect in the Republic of Congo.

In June, Xstrata started exporting iron ore concentrate as by-product from a copper mine in Australia at the modest annual rate of 1.2 million tonnes, it's only source and a pittance by global standards.

"Obviously the company (Glencore) must believe strongly that the commodity cycle has bottomed and that China's economy is in for a better-than-expected landing, hence their takeover bid being launched now," said Fat Prophets mining analyst Angus Geddes.

Some analysts say it might be risky at this stage to go big on iron ore amid signs Chinese demand growth is slipping.

"We are seeing early signs of iron ore demand decreasing so it doesn't make sense to engage on greenfield expansion for iron ore right now," said Henry Liu, head of commodity research at Mirae Asset Securities in Hong Kong.

"From 2003 to 2011, we have seen the demand growth peak in iron ore and with more mines coming onto the market in 2014 or 2015, there may be an oversupply," he said.

(Additional reporting by Manolo Serapio Jr. in Singapore and Narayanan Somasundaram in Sydney; Editing by Neil Fullick)

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