Nippon Steel, Japan’s largest steelmaker, is considering a merger with domestic rival Sumitomo Metal Industries next year.

If approved the merger would create the world’s second-largest steel company by output. The deal would rank the new company as the world’s second-largest steel producer after ArcelorMittal.

The new company would have a production capacity of more than 50Mt/y of crude steel. This would be some way behind ArcelorMittal with about 100Mt/y but ahead of Japan’s other major steelmaker, JFE which has 34Mt/y.

The two companies already hold minority stakes in each other. Since 2002, they have also had an alliance in the semi-finished steel products business.

In a press release, the companies said the merger would enable them to become more competitive in areas such as developing new products and technology in the energy and environment-related sectors, in addition to helping cut costs and meet rising demand for steel in emerging markets.

The two sides are considering building furnaces and processing plants in emerging economies that could more easily supply Japanese automakers and appliance manufacturers that have shifted production there.