Japan's downstream should begin to reap consolidation rewards soon

The sharp rise in crude oil prices of the past year has prevented Japan's oil refiners from seeing the full benefits of the extensive restructuring that they have undertaken. Most of them have revised downwards their profit estimates for the current fiscal year, and some are likely to see even more red ink spilled over their bottom lines. The outlook is not all doom and gloom, however.


TOKYO�The sharp rise in crude oil prices over the past year has prevented Japan's oil refiners from seeing the full benefits of the extensive restructuring that they have undertaken. Most of them have revised downwards their profit estimates for the current fiscal year, and some are likely to see even more red ink spilled over their bottom lines.

Analysts say, however, that the outlook is not all doom and gloom. Crude prices have begun to stabilize, and Japan's refiners should reap the benefits of their restructuring efforts this fiscal year, which began Apr. 1.

Consolidation
Dismal profits in the Japanese refining sector led the country's seven leading oil companies to reorganize into four major groups during the past 12 months.

Nippon Oil Co. and Mitsubishi Oil Corp. merged in April 1999, and Cosmo Oil Co. Ltd. later entered a broad-based business alliance with Nippon Mitsubishi Oil Co. Tonen Corp. and General Sekiyu KK, both affiliates of ExxonMobil Corp., will merge effective July 1, following the merger of Exxon Corp. and Mobil Corp. last November. And in March, Japan Energy Coro. and Showa Shell Sekiyu KK agreed to a wide-ranging alliance in oil refining, distribution, and lubricant businesses.

But profits have not yet reacted fully to the industry's reorganization.

Idemitsu Kosan Co. has just announced that it expects to post 13 billion yen ($119.2 million) in pretax profit for the year ended Mar. 31, up more than twofold from a year earlier, because of foreign-exchange gains and lower interest payments. However, the leading Japanese refiner and wholesaler, which is unlisted, pointed out that its new pretax profit estimate for the past fiscal year falls short of its original forecast of 15 billion yen because of its delay in raising domestic retail product prices to reflect the rise in global crude oil prices.

Nippon Mitsubishi Oil Corp., the nation's largest refiner-marketer, estimates a group net loss of 5 billion yen, compared with its original estimate of a 12 billion yen net profit. Meanwhile, Cosmo Oil is likely to see its operating profit fall more than 50%, while Japan Energy Corp. will likely post its second consecutive operating loss, according to analysts.

Mobil Sekiyu KK reported a 7.4 million yen net profit for calendar year 1999, however, vs. a net profit of 1.9 million yen in 1998. Mobil said its profit growth was due to the rise in product sales and to cost cutting measures.

Sector woes
The biggest problem facing Japanese oil companies is that extremely stiff competition at the retail level means they have been unable to pass crude price increases on to the consumer.

Oil companies are also plagued by severe refining overcapacity. Analysts say that Japan's 5.3 million b/d of distillation capacity needs to be cut by as much as 1 million b/d.

Efforts have begun to remedy this situation: Japan Energy and Showa Shell plan to slash combined capacity by 16%, or about 200,000 b/d, by next March. The goal is to save 15-20 billion yen/year in costs. They also expect to join forces in the distribution and lubricant businesses, saving them a combined 10 billion yen/year.

Nippon Mitsubishi and Cosmo Oil are now combining their crude oil purchases, tanker allocations, refinery operations, storage and distribution terminals, and domestic product deliveries. The resulting cost reduction is estimated to reach 15 -20 billion yen within 3 years.

Companies also have started cutting off financial support to loss-making affiliated service stations, and the number of stations going under is rapidly speeding up.

Analysts say that the market will probably improve this fiscal year due to the major oil companies' determination to maintain retail price stability, a cause that will be aided by the new alliances. But they also warn that much work remains to be done if the sector is to return to truly healthy footing in the long term.

Although companies have made marked progress in cutting costs by reducing staff and streamlining distribution costs, they still have to tackle the problems of overcapacity at the refining and retail levels. They argue that Showa Shell's moves to cut refining capacity will make little difference to the overall supply-demand balance unless other refineries are also closed. They also say that, although pumps are closing, this process needs to be speeded up, given that up to 40% of them eventually will have to be eliminated.

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