Japan's Nippon Steel Corp. and Sumitomo Metal Industries Ltd. plan to combine their businesses next year, creating the world's second-biggest steel maker.

Nippon Steel, Japan's No. 1 steel maker with a stock market value of about $23 billion, and its smaller rival worth $12.5 billion said Thursday that they aim to be operating as a single company by October 2012.

Both want to expand global operations, especially in China, India and other emerging countries where demand is expected to grow while consolidating operations in the shrinking Japanese market.

The combined company with annual steel production of 47.8 million metric tons based on 2010 figures would be a distant No. 2 behind the world's biggest steel maker Luxembourg-based ArcelorMittal SA.

Japanese steel makers have been struggling to stay competitive amid a shakeup of the global steel industry.

"We plan to establish a stronger structure so that we can compete globally, as we expect the world's steel industry will keep growing," said Sumitomo President Hiroshi Tomono.

The two companies formed a business alliance in 2002 through cross-shareholdings and mutual supply of steel materials.

The terms of the deal and the name of the new company are still being decided.

It would be the first takeover in Japan's steel industry since NKK and Kawasaki Steel joined forces in 2002 to create Japan's No. 2 steel maker JFE Holdings Inc.

Economy, Trade and Industry Minister Banri Kaieda said he "highly" welcomed the deal between Nippon Steel and Sumitomo Metal.

"It would be a pioneer case of creating a globally competitive company," he said.