Why The European Debt Crisis Could Actually Be Good For Commodity Prices

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Photo: Shell via Flickr

It is widely accepted that the European debt crisis is driving down commodity prices in the near-term because of its impact on economic growth and commodity trade finance. A Financial Times report by Javier Blas however points out that the crisis could in fact be bullish for commodities in the medium term.

Banks typically lend billions to mining, oil, gas and farming companies to help boost production. But they have grown cautious about financing big projects, because of new capital requirements.

French banks like BNP Paribas, Credit Agricole and Societe Generale are some of the biggest financiers of the natural resources industry according to Blas. As they have to bolster their capital, credit to these projects is declining, making borrowing more expensive.

So it all adds up. If the growth of such “project financing” continues to decline, fewer natural resources projects will take off in the coming years, and this in turn would impact the supply of commodities, driving up prices.

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