The whopping shortfall for Nippon Steel and Sumitomo Metal Corp. of a $3.9 billion combined net loss in its fiscal first half was largely linked to stock investment losses and the writedown of money-losing Japanese mills.

The world's second biggest steelmaker was created through the recent merger of Japan's Nippon Steel and Sumitomo Metal. The two Japanese giants formally merged last month, creating the world's second largest steelmaker behind India's ArcelorMittal.

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

However a slowing global economy and weakening vehicle production are threatening steelmakers' bottom line.

Japanese producers have also struggled with an unfavorable exchange rate, which saw the yen hit record highs against the dollar late last year, making their exports less competitive overseas.

"We are in the situation of mounting uncertainties as nobody can predict how the situation is going to play out or when a recovery is set to start," said Executive Vice President Fumio Hombe.

In its results Friday, the combined firm said Nippon Steel alone booked a loss of 176.66 billion yen (US$2.2 billion) in the six months to September, reversing a year-earlier profit, with sales down 5.4%.

Sumitomo Metal lost 133.85 billion yen in the same period, expanding its year-earlier loss, on slightly higher sales.

Combined revenue was about $32.7 billion, they said.

On Friday, the firms said domestic steel demand was steady in the key construction and auto sectors after last year's quake-tsunami disaster, but the expiry of government eco-vehicle subsidies could take a bite out of demand for new vehicles.

Japanese steelmakers are also struggling against fierce competition from Chinese and South Korean rivals, while a global economic slowdown has weighed on demand for steel, used in everything from cars to smartphones.

"Steel demand overseas is beginning to weaken after having been driven largely by strong demand in Asia," the company said in a statement, warning of a supply glut that is "causing the deterioration of the steel market."

"In this severe operating environment, the company continued its efforts to maximize cost improvements," it added.

Copyright 2012 Agence France-Presse