An $80 billion (50 billion pound) marriage of commodities trader Glencore
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-existent in iron ore mining.
Xstrata wants 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
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 urbanisation 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
There is no doubt Xstrata would like to do more in iron ore but if they want to be big they have to buy a big player, said Macquarie steel and iron ore analyst Colin Hamilton.
Xstrata is considering an all-share merger of equals with Glencore, which would leave the new entity with low enough debt to fund a big push into iron ore, including possible acquisitions in competition with the likes of big miners Vale, Rio
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 authorised 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.
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.
Rio de Janeiro-based Vale failed to buy Xstrata in 2008 for an estimated $90 billion.
It makes sense because if you want to hit the industrialised 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
The Pilbara is also closer to China, the world's largest iron-ore consumer, than key sources of high-grade ore in Brazil and Africa, giving it an advantage on shipping costs and times.
Steelmakers would certainly welcome a new iron ore player that could challenge Vale, BHP Billiton and Rio Tinto which, they feel, have too much power when it comes to iron ore price.
The big three together account for about 70 percent of the global seaborne iron ore trade.
In order to become a significant player in the iron ore market however, Xstrata and Glencore would have to move quickly, as the big three are also expanding their iron ore mining activity.
They should rely on a combination of takeovers and new projects development, said Meps iron ore analyst Kaye Ayub.
New projects are expensive to get going and it takes time to take them to fruition so a mixture of the two would be a better way to expand.
Xstrata's stiffest competition for iron ore mines could come from Vale, the world's biggest iron ore producer. Vale mines about 300 million tonnes a year in Brazil and accounts for more than a quarter of world sea-borne exports. Australian assets would help it cut shipping costs to China, its main market, and better compete with BHP Billiton and Rio Tinto.
Vale already operates in partnership with Aquila in coal mining and has been long-rumoured 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 <600005.SS> 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, making the risks that come with huge investment projects more affordable.
If Xstrata's attempt to acquire AngloAmerican
But the collapse of 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 prosect 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, its 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 in Singapore, Narayanan Somasundaram in Sydney, Jeb Blount in Rio de Janeiro and Silvia Antonioli in London; Editing by Neil Fullick and William Hardy)