Tuesday this week, Nippon Metal Industry and Nisshin Steel announced plans to merge in a business deal that would form the second-biggest stainless steel mill in Japan.

Both companies will have a market capitalization of $1.6 billion after the deal, expected to go down before 12th October, is completed. Nisshin already owns a 5 % stake in Nippon and is valued at $1.4 billion.

Though the firms failed to provide specifics on the deal, they said that a holding company would be formed to run the new combined business. The deal comes at a time when both Nisshin and Nippon are faced with weak demand in their local market as well as growing competition from international equals.

“The business environment of stainless steel industry has been going through drastic changes in recent years,” said a statement released by Nisshin Steel. “The companies believe that it is indispensable for them to further tighten their relationship.”

The announcement was further met with negative reactions from the markets in Tokyo. By the close of trading, Nisshin stock price had slumped by 6.9 %, and Nippon Metal’s share lost 6.4%.

Persons privileged with the information about the deal said that it is the largest amalgamation in the steel industry. At the beginning of the year, Sumitomo Metal Industries and Nippon Steel announced an analogous deal to form the world’s second-largest steel maker valued at $24.5 billion.

Rising costs for raw materials; coking coal and iron ore used in the making of steel have led to global merging in the steel industry as firms seek to cut down on operation costs.