• Kyodo, Bloomberg

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JX Holdings Inc., the nation’s largest oil distributor, has agreed to merge with rival TonenGeneral Sekiyu K.K., sources said Wednesday, in a further push for refinery consolidation amid falling demand for oil products.

The move comes after Idemitsu Kosan Co., the No. 2 player in the sector, agreed last month to integrate businesses with Showa Shell Sekiyu K.K. as early as next October.

JX and TonenGeneral, which ranks third, have already acknowledged they are in merger talks. They are expected to announce the deal by the end of the week.

Citing a “severe business environment” in the oil industry, JX said the merger with TonenGeneral would strengthen its petroleum business.

They will work toward merging through a share swap in roughly 2017, the sources said.

The combined sales of the firms are ¥14.3 trillion, compared with the ¥7.6 trillion of Idemitsu and Showa Shell combined.

The government is encouraging refiners to consolidate and to cut processing capacity amid declining fuel demand.

If a deal between JX and TonenGeneral is completed, the new company would control about half of the country’s gasoline market, while a combination of domestic competitors Idemitsu Kosan Co. and Showa Shell Sekiyu K.K., which agreed to merge last month, would hold about a third.

JX itself was created through a merger of several firms in 2010.

“A merger will benefit the two companies as it will help them reduce capacity and cut costs,” Polina Diyachkina, an analyst at Macquarie Group Ltd., said. “This merger, along with Idemitsu and Showa, will likely bring Japan’s refiners down to three and will help improve supply discipline leading to higher margins.”

Demand for oil-related products will fall about 6.8 percent between March 2015 and March 2020, according to a forecast by the Ministry of Economy, Trade and Industry.

The two companies will merge by issuing JX stock to TonenGeneral shareholders. They aim to save about ¥100 billion a year from the integration through shutting refineries and other measures, the Nikkei financial daily reported.

The companies will hold board meetings to kick off official merger talks as soon as Thursday.

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