Nippon Oil, Nippon Mining to Cut Refining Capacity at Mizushima

By Megumi Yamanaka

Jan. 7 (Bloomberg) -- Nippon Oil Corp. and Nippon Mining Holdings Inc., which last month agreed to merge and form Japan's largest refining company, plan to reduce processing capacity at two of their refineries to cope with falling demand.

Combined capacity at the plants at Mizushima in central Japan will be cut to between 300,000 and 350,000 barrels a day from 455,200 barrels, said two officials at the companies, who declined to be named because the details are confidential. Units for producing petrochemicals such as paraxylene, used to make polyester fiber, may be added, they said.

Nippon Oil President Shinji Nishio last month pledged to cut the refining capacity of the merged company by 400,000 barrels a day, or 24 percent, within two years as an ageing population coupled with a switch to cleaner-burning fuels curbs Japanese demand. Petroleum consumption in the country has fallen each year since 2006, prompting some refiners including Nippon Mining to expand petrochemicals production to tap Chinese demand.

``It's a step forward but it's not enough,'' Hidetoshi Shioda, a senior analyst at Mizuho Securities Co., said by telephone from Tokyo. ``Demand is falling rapidly and Japan suffers from about 20 percent overcapacity. I expect more cuts.''

The capacity reduction at Mizushima will likely be undertaken at Nippon Oil's 250,000 barrel-a-day refinery, the two officials said. The two plants sit across the Mizushima bay and are connected by pipelines.

Spokesmen for Nippon Oil and for Japan Energy Corp., the refining unit of Nippon Mining, said the companies are still in negotiations and have yet to decide on capacity reduction.

Falling Demand

Consumption of oil-based fuels in Japan fell 4 percent in 2007 as factories and power producers shifted to natural gas, while gasoline sales dropped 1.7 percent. The trade ministry is yet to release data for 2008.

Falling demand has forced Japanese refiners to idle capacity. They processed 4.01 million barrels a day of crude in the year ended March 2008, compared with a capacity of 4.89 million barrels a day. The trade ministry expects consumption to drop 2.9 percent annually through March 2013.

Nippon Mining President Mitsunori Takahagi said in 2007 the company is studying the possibility adding a paraxylene unit capable of producing at least 500,000 metric tons annually, as part of its plan to tap demand from China.

Nippon Oil and Nippon Mining will sign a contract in March and combine under a holding company in October 2009, Nishio and Takahagi said Dec. 4. The merged company will have a refining capacity of 1.85 million barrels a day.

To contact the reporters on this story: Megumi Yamanaka in Tokyo at myamanaka@bloomberg.net.