Japan's Biggest Oil Refiners Consider Merger as Demand Drops

  • JX, TonenGeneral seek 100 billion yen annual savings: Nikkei
  • Japan government encouraging refining industry consolidation

Japan’s two biggest oil refiners, JX Holdings Inc. and TonenGeneral Sekiyu K.K., said they are in talks to merge after the Nikkei newspaper reported the two companies reached a broad agreement on a deal.

JX and TonenGeneral are considering a business integration, though no decision has been made, they said in separate statements on Wednesday. The refiners plan to merge by 2017 after getting approval from the Fair Trade Commission, the Nikkei newspaper reported, without citing anyone.

“Due to the severe business environment surrounding the oil industry, we are considering the merger with TonenGeneral in order to strengthen the competitiveness of our petroleum business,” JX Holdings said in its statement.

The Japanese government is encouraging refiners to consolidate and to cut processing capacity amid declining fuel demand. If a deal between JX and TonenGeneral is completed, the new company would control about half of the country’s gasoline market while a combination of domestic competitors Idemitsu Kosan Co. and Showa Shell Sekiyu K.K., which agreed to merge last month, would hold about a third.

“A merger will benefit the two companies, as it will help them reduce capacity and cut the costs,” Polina Diyachkina, an analyst at Macquarie Group Ltd., said by phone. “This merger, along with Idemitsu and Showa, will likely bring Japan’s refiners down to three and will help improve supply discipline leading to higher margins.”

Demand for oil related products will fall about 6.8 percent between March 2015 and March 2020, according to a forecast by the Ministry of Economy, Trade and Industry.

The two companies plan a merger by issuing JX’s stock to TonenGeneral shareholders and aim to save about 100 billion yen ($814 million) a year from the integration through shutting refineries and other measures, Nikkei reported. The companies could announce the deal as early as this week, the newspaper said.

The companies will hold board meetings to officially begin merger talks as soon as tomorrow, Kyodo News reported on Wednesday. The companies declined to comment.

TonenGeneral dropped as much as 1.4 percent to 1,185 yen in Tokyo trading, which would be its lowest level on a closing basis since September. The shares were down 0.7 percent at 1,119.0 yen as of 11:11 a.m. in Tokyo. JX was up 0.2 percent, while the Nikkei 225 Stock Average fell 0.2 percent.

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