Japanese Refiners Agree to Merge as Fuel Consumption Shrinks

  • Idemitsu bought third of Showa Shell in July for $1.4 billion
  • Companies have combined market capitalization of $5.8 billion

Idemitsu Kosan Co. signed a non-binding agreement to merge with Showa Shell Sekiyu K.K., almost four months after buying a third of its rival Japanese refining company.

Idemitsu and Showa Shell, which have a combined market capitalization of about $5.8 billion, expect to complete a deal between October 2016 and April 2017, the companies said in a filing on Thursday to the Tokyo Stock Exchange. Idemitsu agreed in July to purchase a 33.24 percent stake in its rival from Royal Dutch Shell Plc for 169 billion yen ($1.4 billion). At that price, the entirety of Showa Shell would be valued at about $4.1 billion.

A full combination of the two would create a company with about a third of the domestic gasoline market and would follow agreements between Japan processors to consolidate some plants as they struggle with lower fuel demand. JX Holdings Inc., the country’s biggest refiner, cut it’s full-year net income target by 72 percent to 450 billion yen this month, citing inventory losses and lower refining margins.

“Amid falling demand, a decline in refining capacity or a number of players will have a positive impact on prices and margins,” Shogo Tono, a Tokyo-based senior credit analyst at Mizuho Securities Co., said by phone. “It’s credit positive for the entire industry if oligopoly helps them secure stable margins.”

Demand Slide

Oil demand in Japan has been declining as the nation’s population shrinks and as a shift to more energy-efficient cars prompts refiners to lower output. The government, a backer of industry consolidation, has asked for cuts in processing capacity as the U.S. boosts exports and China floods Asian markets with its surplus supply.

TonenGeneral Sekiyu K.K. agreed in December to link its Chiba refinery with Cosmo Oil Co.’s neighboring plant to increase production efficiency. And Cosmo Oil has held talks with companies on possible partnerships for its Sakai and Yokkaichi refineries, President Keizo Morikawa told reporters in May.

“The current market conditions are severe in Japan,” Susumu Nibuya, director at Idemitsu, said during a briefing Thursday. “As one company, our natural synergies will help us cut costs and increase the value of our products in a way we couldn’t if we were two.” A value for the transaction wasn’t provided.

Japan’s oil market is in a prolonged period of oversupply that endangers businesses from refiners to distributors and domestic demand is expected to decline further, according to Thursday’s exchange filing by the companies.

Before it's here, it's on the Bloomberg Terminal.