Was Metallgesellschaft's use of petroleum futures part of a rational corporate strategy?

Abstract

Financial losses incurred in trading petroleum futures by Metallgesellschaft have been viewed as a mistake that occurred because the firm's Supervisory Board overreacted. However, these conclusions have been based on an incomplete analysis of the firm's business and petroleum markets. Metallgesellschaft's futures market position was excessively large, poorly distributed, and in the wrong products when the firm's long-term, fixed-price supply arrangements are balanced against its obligations to customers. Furthermore, Metallgesellschaft was unprotected financially against its long-term purchase obligations if its customers triggered the so-called “blowout” option. Finally, Metallgesellschaft's trading practices exposed the firm to the risk that the specifications of the commodities it had agreed to deliver would change and to the risk of manipulation by other firms. At least one large company has reported publicly that it profited at Metallgesellschaft's expense.