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Nippon Oil and Nippon Mining To Merge

Nippon Oil Corp and Nippon Mining Holdings Inc are merging to slash capacity and costs as a global slowdown hits demand for oil products

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.

After the news of merge appeared, the shares in both companies jumped more than 15 percent, 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 6 percent as talk of a shake-up grew.

The merger, to be finalized next October, may signal the start of a long-awaited consolidation in Japan's refining sector, saddled with aging plants and weak retail margins.

"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."

Japanese Energy Minister Toshihiro Nikai said the merger was ambitious and extremely important for Japan, which imports 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.

"We must take drastic measures to cut costs and implement changes if we are to win in an increasingly competitive industry," said Mitsunori Takahagi, the head of Nippon Mining.

The merger ratio and the new company's name will be decided later, they said. The new business will have three units: refining and sales, oil exploration, and metals.

Author: Ksenia Kochneva