The Billion Dollar Oil Bet That Nearly Killed Germany's Metallgesellschaft

In 1991, German business magazine named Heinz Schimmelbusch “Manager of the Year.” Two years later, he was fired for nearly destroying one of Germany’s oldest industrial companies. Chapter 15 of Torsten Dennin’s “From Tulips to Bitcoins” tells the story of Metallgesellschaft, and it is one of the most painful corporate implosions in the book.

The Youngest CEO in Germany

Schimmelbusch became CEO of Metallgesellschaft in 1989. He was the youngest CEO in German corporate history at the time. And he had big plans.

Metallgesellschaft was not some startup. The company was founded in 1881. Over a century of history in mining and commodity trading. It was one of Germany’s industrial pillars. But Schimmelbusch wanted more. He went on an acquisition spree. Feldmuhle Nobel. Dynamit Nobel. Buderus. Cerasiv. By the early 1990s, the empire had grown to 15 billion dollars in revenue with over 250 subsidiaries.

On paper, this looked like a powerhouse. In reality, the company was becoming harder and harder to manage. And the real danger was not in the German operations. It was sitting in an American subsidiary that most people had never heard of.

MGRM and the Oil Contracts

Metallgesellschaft Refining and Marketing, or MGRM, was the US arm of the company. It had a simple business model. Sell fuel oil, gasoline, and diesel to large American customers at long-term fixed prices. Five-year contracts. Ten-year contracts. Lock in the price, collect steady revenue.

The problem was obvious. MGRM was promising to deliver oil at fixed prices years into the future. But it did not own that oil. It had to buy it on the open market. If oil prices went up, MGRM would have to pay more for the oil than it was charging its customers. Classic risk.

So MGRM hedged. They bought oil futures contracts and rolled them forward every month. Buy a one-month contract, let it expire, buy the next one. Repeat for years.

From 1984 to 1992, this strategy worked beautifully. The oil market was in what traders call “backwardation.” That means future oil prices were lower than current prices. So every time MGRM rolled their contracts forward, they were buying cheap futures to replace expiring ones. They made money on the roll itself, on top of the hedging fees. It looked like free money.

MGRM scaled up aggressively. At its peak, the subsidiary controlled 10 to 20 percent of all one-month-forward oil transactions on the market. That is not a hedge. That is a position so large that the market itself starts reacting to your trades.

1993: The Market Flips

Then the oil market changed.

In 1993, oil prices declined sharply. And the term structure flipped from backwardation to “contango.” Contango means future prices are higher than current prices. The exact opposite of what MGRM’s strategy needed.

Now every monthly roll cost money instead of making it. Every time MGRM replaced an expiring contract with a new one, it paid more. The small monthly gains that had accumulated for years turned into widening monthly losses.

And it got worse. As oil prices fell, the futures positions showed massive unrealized losses. Futures exchanges require margin payments. You have to put up cash when your positions move against you. MGRM’s margin calls kept growing. The exposure reached 600 million dollars. That was one-tenth of the entire parent company’s balance sheet sitting in one bet.

Credit rating agencies noticed. Downgrades followed. Downgrades made borrowing more expensive. More expensive borrowing made the liquidity problems worse. The liquidity problems made the credit ratings drop further. A vicious circle that fed on itself and kept accelerating.

December 17, 1993

The board had seen enough. On December 17, 1993, Metallgesellschaft fired Schimmelbusch and the CFO. The “Manager of the Year” was out. Kajo Neukirchen was brought in to save whatever could be saved.

Neukirchen’s first move was to close all oil positions immediately. Every single one. This crystallized the losses. Over one billion dollars, gone. But at least the bleeding stopped.

The total damage was staggering. Group liabilities ballooned to approximately 5 billion dollars. Deutsche Bank and Dresdner Bank had to organize a bailout of 2 billion dollars to keep the company alive. Seven thousand five hundred employees lost their jobs.

The company that Schimmelbusch had built into a 250-subsidiary empire was gutted. Metallgesellschaft survived, barely, but it was never the same. It went through restructurings and name changes. By 2005, it had become GEA Group, a completely different company.

What Stays With Me

A few things from this chapter.

First, the hedge that was not really a hedge. MGRM’s strategy only worked in one specific market condition: backwardation. When conditions changed, the “hedge” turned into the biggest source of risk in the entire company. This is something I see over and over in financial history. People build strategies that work perfectly in one environment and then assume that environment will last forever. It never does.

Second, the scale problem. Controlling 10 to 20 percent of a market means you cannot exit quietly. When MGRM needed to get out, everyone knew it. The market knew they had to sell. That is the worst possible negotiating position. Same thing happened to the Hunt brothers with silver. Same thing happened to Long-Term Capital Management with bonds. When your position is too big relative to the market, the market becomes your enemy.

Third, the speed of corporate destruction. In 1991, Schimmelbusch was on magazine covers. By the end of 1993, he was fired and his company was begging banks for survival loans. Two years from hero to disaster. Dennin uses this chapter to show how quickly leverage and complexity can turn an industrial giant into a bankruptcy candidate.

The Metallgesellschaft story is not about oil. It is about what happens when a company bets its existence on market conditions staying the same. Markets do not stay the same. They never have. They never will.

Previous: Chapter 14: Gulf War Oil

Next: Chapter 16: Silver Wise Kings

This is part of my From Tulips to Bitcoins book retelling series.