The Japanese oil sector may be poised for a flood of defensive mergers after the country’s biggest player, Nippon Oil, announced plans to merge with its smaller rival Nippon Mining in a joint bid to slash costs.

The group would become the world’s eighth biggest oil major in a world where crude oil has crashed more than 70 per cent from its peak and the Japanese auto industry has invested billions in technology that might one day wean the world’s motorists off gas-guzzling cars.

In the same breath that the deal was announced, the president of Nippon oil said that the two companies would jointly slice about 400,000 barrels per day from crude oil refining capacity by 2012. The merger, which was described by analysts as “transparently defensive”, is expected to prompt Japan’s smaller oil players into action. Takashi Enomoto, of Merrill Lynch, predicted “consolidation and realignments” among local refiners.

Investors have regularly attacked the Japanese oil refiners for their failure to close creaking plants and lay off workers when economic conditions were better. Margins have accordingly been wafer thin. Analysts said they remained sceptical that Nippon Oil would prove itself up to the task of ordering the necessary cuts in production and staff. The combined company will have plenty of scope for closures of refineries and petrol stations — when placed together, the portfolios will include ten of the former and 13,000 of the latter.

The proposed merger will create Japan’s fourth largest company, with combined annual sales of more than Y13 trillion (£96 billion) and a commanding dominance of domestic petrol retail and refined oil products. But because of the diversity of Nippon Mining’s business portfolio, the company would also be Japan’s largest copper processor.

Copper prices have fallen more than 50 per cent since their peak earlier this summer, and market players are predicting even deeper capitulation in coming months as inventory increases around the world and markets absorb the severity and suddenness of the construction downturn in China.

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