Two of Japan's biggest steelmakers will formally merge on Monday, creating the world's second largest firm in the sector as they look to outpace their Chinese and South Korean rivals.

Nippon Steel, the nation's number one steel company and third-ranked rival Sumitomo Metal Industries will combine to form a giant second only to India's ArcelorMittal.

Global competition in the steel industry has intensified in recent years even as demand has been spurred by emerging economies such as China, which are undertaking massive construction, infrastructure and manufacturing projects.

But economic fears have weighed on steel demand and Japanese producers have struggled with an unfavourable exchange rate, which saw the yen hit record highs against the dollar late last year.

Even with their economies of scale, Nippon Steel & Sumitomo Metal Corp., will still be a distant second to behemoth ArcelorMittal, with less than half of its annual production.