How Metallgesellschaft lost $1.3 billion on speculative bets in oil future markets

Metallgesellschaft AG Oil Rig

was formerly one of Germany’s largest industrial conglomerates based in Frankfurt. It had over 20,000 employees and revenues in excess of 10 billion US dollars. It had over 250 subsidiaries specializing in mining, specialty chemicals, commodity trading, financial services, and engineering.

Hedging debacle

In 1993, the company lost $1.3 billion suffering from flawed long hedge strategy in near term futures contracts that was meant to protect against forward sales commitments. A fall in spot prices forced margin calls for the company and the contracts were closed at a loss. Subsequently, the spot price increased and the company suffered even greater losses covering its customer commitments.

It is debated whether the company was speculating after unwinding the long futures hedge since they became essentially exposed or naked against their forward customer commitments. futures market. It also became involved in a key European Court of Justice case.

Heinz Schimmelbusch, CEO

Heinz Schimmelbusch began his career at Metallgesellschaft AG (MG AG), also known as MG, in 1973. Schimmelbusch was the Chief Executive Officer (1989 to 1993) of Metallgesellschaft. Metallgesellschaft AG based in Frankfurt was one of Germany’s largest industrial conglomerates. It had over 250 subsidiaries specializing in mining, specialty chemicals, commodity trading, financial services and engineering.

Under the leadership of CEO Heinz Schimmelbusch, Metallgesellschaft entered the oil business by selling fuel to customers via its American subsidiary, MG Refining and Marketing in the form of fixed price long term contracts of up to 10 years. Metallgesellschaft attempted to hedge its exposure to rising oil prices on the futures market. Unfortunately, in 1993, oil prices began to drop and Metallgesellschaft’s derivatives strategy turned into extensive paper losses. The company’s largest shareholder, Deutsche Bank found out and responded by ousting Schimmelbusch and liquidating Metallgesellschaft’s positions which turned the virtual losses into real losses. The decision by the MG AG supervisory board to end MG Refining and Marketing (MGRM)’s marketing program early – against loud protests from Heinz Schimmelbusch and the management board – precipitated massive international controversy.

Metallgesellschaft AG almost went bankrupt after losing an estimated $1.3 billion on speculative bets in oil future markets.

The company is now part of GEA Group Aktiengesellschaft.

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