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Nippon Oil merges to cut capacity, costs
Nippon Oil, Japan's biggest refiner, is merging with smaller Nippon Mining Holdings in a move to cut capacity and costs as a global slowdown hits demand for oil products.
- Reuters
- Published: 23:35 December 4, 2008
Tokyo: Nippon Oil, Japan's biggest refiner, is merging with smaller Nippon Mining Holdings in a move to cut capacity and costs as a global slowdown hits demand for oil products.
The merger, to be fin-alised next October, may signal the start of a long-awaited consolidation in Japan's refining sector, saddled with ageing plants and weak retail margins, and could presage more global deals as operators bid farewell to four years of record high margins and brace for contracting oil demand.
Shares in both companies jumped more than 15 per cent in Tokyo yesterday, taking their combined market value to above $8.8 billion. Domestic rivals Showa Shell, part owned by Royal Dutch Shell, and Idemitsu Kosan rose by around six per cent as talk of consolidation grew.
A combined Nippon Oil/Nippon Mining will cut refining capacity by around a fifth, or 400,000 barrels per day, by April 2012, the companies' presidents told a news conference. The cut is equal to around eight per cent of total capacity in the world's third-largest oil consumer.
The new company, also Japan's top copper processor, aimed to cut costs by 60 billion yen ($645 million) by April 2013, and eventually strip out more than $1 billion in annual costs.
A global slowdown has halved refining margins since the spring, with Japan hit particularly hard as its population is shrinking and drivers were quick to switch to more fuel-efficient cars after fuel prices spiked this year.
"This could trigger consolidation and realignments among local oil refiners," Merrill Lynch analyst Takashi Enomoto said in a client note, "and low oil refining margins in Japan, compared to global levels, may see structural correction."
Important move
Japan's energy minister said the move was ambitious and "extremely important" for Japan, which has to import all its fuel needs.
Combined sales at Nippon Oil and Nippon Mining are forecast at 13.15 trillion yen ($141 billion) in the year to March.
Nippon Oil President Shinji Nishio said refinery capacity was being reduced to make the companies more cost competitive. "It's important we win in terms of cost effectiveness, at least in the Asian market," he said.
A merger would allow the firms to take advantage of scale and reach to close under-utilised or unprofitable refineries.
Mitsunori Takahagi, the head of Nippon Mining, said: "We must take drastic measures to cut costs and implement changes if we are to win in an increasingly competitive industry."
UBS analyst Toshinori Ito said the merger was positive for both companies and would be good for the industry as a whole as it would create leadership in pricing, help eliminate excess price competition, and tighten the supply-demand balance.
Japanese refiners with excess capacity for the domestic market have turned to exports to keep plants busy, but shrinking oil demand in industrialised nations and a halt in Chinese fuel imports have squeezed any profit out of exports.
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