Metallgesellschaft

1.0 CASE 1: Metallgesellschaft

1.1 Background

Metallgesellschaft AG is a German conglomerate, owned mainly by Deutsche Bank AG, Daimler-Benz, the Dresdner Bank AG, Allianz, and the Kuwait Investment Authority. The parent corporation Metallgesellschaft AG is a large conglomerate with interests in a wide variety of mining, metal, shipping and engineering businesses and it includes 15 major subsidiaries. One of their groups, which is the Energy Group, was found responsible for the losses of approximately $1.3 billion in December 1993. They started to venture into the derivatives market in 1991 with the help of Mr. Arthur Benson from Louis Dreyfud Energy. It was said that Benson’s strategy leads them to the losses that they incurred.

1.2 The Losses

What actually happened is that the so-called best and profitable marketing strategy turns out to be a reckless one when they did not expect the unexpected. In the year of 1992, Metallgesellschaft AG formed a strategy based on a long-term strategy. The company agreed with retailers to sell gasoline, heating oil and jet fuel for up to 10 years at fixed prices that were higher than the spot prices. They have devised 3 types of contracts that were firm-fixed, firm flexible and guaranteed margin. Firm-fixed is a contract in which the customer agrees to fixed monthly delivery at a set price and that the company will supply 102 million barrels over 10 years by September 1993. The second contract, firm-flexible, which is similar to the first contract, offers greater flexibility over the delivery to the customer. Customer can set the delivery schedule for up to 20% of its needs in any year, besides the fixed price commitments. Metallgesellschaft is required to supply 52 million barrels over 10 years in the firm-flexible program. Last but not least, the guaranteed margin is a contract where the company would deliver at a fixed margin relative to the local area retail price and the company had agreed to supply 54 million...