Japan's Nippon Steel and rival Sumitomo Metal Industries formally merged on Monday, creating the world's second largest steelmaker amid intensifying global competition.

The two Japanese firms produced a combined 46.1 million tonnes of crude steel in 2011, according to the World Steel Association, topped only by India's giant ArcelorMittal on 97.2 million tonnes.

"I'm convinced that we will be able to survive severe global competition as the world's best integrated steelmaker," Shoji Muneoka, chief executive of the new firm, Nippon Steel & Sumitomo Metal Corp., told a launch ceremony in Tokyo.

But the company's stock got off to a poor start, closing at 158 yen on Monday, down 1.25 percent from Nippon Steel's last price on Friday amid concerns over a slowdown in the Chinese economy.

"The China-linked material sector is weak these days," a senior analyst at a Japanese asset management firm told Dow Jones Newswires. "A drastic restructuring is needed for the shares to recover."

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.

Japanese producers have struggled with an unfavourable exchange rate, which saw the yen hit record highs against the dollar late last year.

Nippon Steel, the nation's number one steel company, and third-ranked rival Sumitomo have faced fierce competition from Chinese and South Korean rivals.

Even with their economies of scale, the new firm is still a distant second to ArcelorMittal, with less than half the behemoth's annual production.