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March 28, 2017

Volume 7 Issue 7

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Japanese Giants Unite

Upon their merger later this week, Japanese oil majors JX Holdings and TonenGeneral Sekiyu KK together will be the country’s largest supplier of lubricants. But observers say it’s not clear how the behemoth will integrate its lubricants operations as it targets more growth in the segment.

After its April 1 merger, the new entity, JXTG Holdings, will begin trying to minimize inefficiencies. For one, there is a need to reduce the number of service stations the two collectively hold, according to Mizuho Bank’s Yamaoka Kenichi. “For the moment, because the companies will continue to market the brands of lubricants of both companies, if they reduce the number of service stations, this will affect the branding strategy of the stations. So it will take some time before any consolidation can take place.”

JX Holdings sells its own brand of lubricants, Eneos, while TonenGeneral markets ExxonMobil’s Mobil-branded oils. It’s estimated that the two supply 40 percent and 10 percent of the domestic market, respectively. “It is important for both companies to leverage on the merger’s synergy,” said Yamaoka, the bank’s joint general manager of industry research department. “But since both companies’ lubricant brands will not be merging…consolidation will take time.”

One way that the new entity can improve its efficiency and track productivity, market demand, and service station sales, Yamaoka told Lube Report Asia, is to connect its entire distribution web via an internet of things (IoT) network. Such a system embeds physical things such as buildings, vehicles and devices with software, sensors and network connectivity to enable these objects to collect and exchange data. The first step will be for JXTG to set up an enterprise resource planning software system, which isn’t a quick process, he added.

The two firms said during planning stages of the merger that they would likely shut down some of their refineries and other facilities deemed superfluous. However, subsequent discussions between Japan’s Ministry of Economy, Trade and Industry and members of the industry led to the agreement that it’s no longer desirable for refineries to reduce capacity. “Against this backdrop, capacity reduction will probably only be limited to those refineries which are unable to improve competitiveness,” Yamaoka continued. He noted that the two companies can improve effectiveness by linking their refineries virtually through IoT.

The tie-up between JX and TonenGeneral, along with a proposed merger between Japan’s other two largest refiners, Idemitsu Kosan and Showa Shell Sekiyu – which has been shelved indefinitely – was initiated in a move to rationalize the nation’s crude oil refining amid a slowdown in demand.

However, Japanese lubricant players plan to leverage their networks and do not expect any further consolidation. “Although there are mergers for oil refineries, as specialized manufacturers, we have our own specialty and niche products and there is no merit in merging,” said Muto Eisuke, chairman of Japan Lubricating Oil Society at a 2017 annual speech to members. “I don’t think it can lead to an improvement in competitiveness and efficiency.”

Mergers of other lubricant manufacturers are unlikely in the foreseeable future, as they are not economically viable, he added. Instead, suppliers may need to open doors more to foreign partners. “I think it is important to think of how we can create a network for the supply of raw materials as part of the lubricant industry’s business continuity plan, and there is a growing understanding that this could include a plan for imports from overseas.”

On March 29, TonenGeneral will delist from the Tokyo Stock Exchange and its subsidiary which manufacturers, markets and exports Mobil-branded products will be absorbed by JXTG. Together with JX Holdings’ lubricant department, carved out in 2015 to expand its overseas sales, the new entity’s lubricants division will have management offices in the Philippines, India, and South Africa, among other countries.

JX Holdings’ subsidiary, JX Nippon Oil & Energy, has three base oil refineries with a combined total capacity to of 640,000 metric tons per year of API Group I and Group II products. 

JX Nippon Oil & Energy also owns 100 percent of a 95,000 t/y naphthenic plant in Chiba operated by Sankyo Yuka Kogyo and 31 percent of Union Sekiyu Kogyo's plant in Iwakuni, which also has 95,000 t/y naphthenic capacity.

TonenGeneral has a 370,000 t/y Group I plant in Wakayama that has not been run at full capacity since fire damaged part of the unit in January.