Nippon Oil, Nippon Mining Agree to Merge, Cut Costs

By Shigeru Sato and Yuji Okada

Dec. 4 (Bloomberg) -- Nippon Oil Corp., Japan’s largest refiner, and Nippon Mining Holdings Inc. have agreed to form Japan’s third-largest company by revenue to cut costs amid plunging demand for fuels.

The companies will sign a contract by March and combine under a holding company in October next year, Nippon Oil President Shinji Nishio and Nippon Mining President Mitsunori Takahagi announced in Tokyo. No financial details were given. Nippon Mining jumped 11 percent in Tokyo trading and Nippon Oil gained 3.4 percent compared with the 1.3 percent decline in the benchmark Topix index.

Japan’s biggest oil-industry merger since 1999 aims to cut costs of 60 billion yen a year as the global slump in fuel demand forces domestic refiners to reduce output and mothball plants. The merged entity will have about 12 trillion yen in annual revenue, about one-third last year’s sales for Exxon Mobil Corp., the world’s biggest oil company.

“Consolidation, but more importantly the removal of refining capacity, is crucial in the Japanese refining sector,” said David Hewitt, a Tokyo-based energy analyst at CLSA Asia Pacific Markets. “Demand is significantly down year on year despite increased fuel oil sales to utilities, a temporary phenomenon.”

Nippon Oil and Nippon Mining, Japan’s largest copper miner and a refiner, will cut crude refining capacity by 400,000 barrels a day, or 24 percent of their combined current capacity, within two years, Nippon Oil’s Nishio said.

New Subsidiaries

“Declining fuel demand has heightened the sense of crisis, and further declines in our earnings will be unavoidable without decisive action,” Nippon Mining’s Takahagi told reporters in Tokyo. “It also is vital for Nippon Mining to boost our fund- raising ability and aggressively invest on metals mining businesses worldwide.”

The merger comes after BHP Billiton Ltd., the world’s largest mining company, withdrew its bid for Rio Tinto Group amid declining commodity prices, and as British Airways Plc and Qantas Airways Ltd. consider a merger as a way to cut costs.

Nippon Oil and Nippon Mining have both lost about 60 percent of their market value this year as oil prices tumbled to less than a third from a record $147.27 a barrel on July 11. Oil traded at $45.70 a barrel at 4:15 p.m. Tokyo time.

Japanese consumers and industrial users are delaying fuel purchases because they expect prices will drop in line with the declining trend of crude oil futures. Demand, already weakened by demographic changes such as a shrinking population, has been damped further by the recession as many factories slash operating rates and shipping lines cut container services.

Slumping Demand

Domestic oil-product demand declined 4 percent last year, marking the second consecutive year of declines. Gasoline sales fell for the first time in 32 years in 2006, and dropped 1.7 percent last year.

“I’d like to applaud this agreement, which is contributing to a stronger Japanese energy industry,” Japan’s Trade Minister Toshihiro Nikai said in an emailed statement. “This is a very ambitious and significant agreement on the back of structural changes in Japan’s oil-refining businesses.”

Nippon Mining & Metals Co., a unit of Nippon Mining Holdings, owns 66 percent of Pan Pacific Copper Co., Japan’s biggest copper smelting company. Nippon Mining is accelerating investment in copper mining developments in South American nations such as Chile to capitalize on expected demand growth from China.

The company’s shares rose 29 yen to 285 yen at the close of trading in Tokyo, the biggest gain since Oct. 29. Nippon Oil rose 11 yen to 331 yen, the most in almost a month.

Restructuring

The new company will be reorganized in April 2010 into three subsidiaries -- refining and sales, oil exploration and metals, according to the companies. Job cuts may be considered after the merger is carried out.

The deal will create a business with revenue of 11.9 trillion yen for the year ended March, ranking third in Japan after Toyota Motor Corp. and Honda Motor Co., according to data compiled by Bloomberg employing the U.S. GAAP accounting standard.

The companies have a combined market capitalization of more than 706 billion yen, including 238 billion yen for Nippon Mining. The will rank 63rd by market capitalization among Japanese listed companies.

This is Japan’s biggest oil-company merger since Mitsubishi Oil Co. and Nippon Oil Co. merged in 1999 to create Nippon Oil, according to the Petroleum Association of Japan.

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net;