Aluminium at six-months high, awaits option expiry

LONDON (Reuters) - Nickel and lead hit all-time highs and aluminium traded at a six-month record on the London Metal Exchange (LME) on Tuesday as the market awaited expiry of key contracts, due on Wednesday.

"It is all about the option expiry -- that is what is driving these markets," an LME trader said, referring to the expiration of December options.

In the open-outcry trading session, aluminium futures traded at $2,840 a tonne, after hitting a six-month high of $2,851 versus $2,815 at the close on Monday.

"The $2,850-level figures as key resistance, and a move above it could signify a breakout," analyst Edward Meir at Man Financial said in a note.

The option expiry, when holders can exercise their right to buy or sell the underlying metals future at a specified price, has become the focus of attention as one U.S. based hedge fund is estimated to be holding between 50 to 80 percent of the available LME stock.

"This situation has created a sense of nervousness in the short-term aluminium market as that large position could either move forward or be brought to delivery, effectively squeezing the market," said Peter Richardson, Deutsche Bank's chief metals economist in a daily note.

Tightness eased slightly, reflected by the premium for cash metal slipping to $1.80/3.80, from $10 on Monday. Last week, cash metal was trading at a discount of $20.50 to the benchmark futures contract.

NICKEL, LEAD AT NEW HIGHS

Nickel hit a new all-time high of $34,500 and was indicated at $34,395/34,400, up against $33,700 on Monday.

"Nickel will be stronger for longer because of Goro and other projects having difficulties," the LME trader said.

Production at Inco's Goro nickel project in New Caledonia, expected to produce 60,000 tonnes at full capacity, is now expected to start later than scheduled, at the end of 2008.

Lead hit a new high of $1,758 a tonne and traded at $1,754 in the open out-cry session. In the previous session, the metal rose by 2.8 percent closing at $1,739.

"We suspect that Far Eastern consumers have found themselves short of material, and are now scrambling to secure metal," analyst David Thurtell at BNP Paribas said.

Stocks in warehouses are now at the same level as in January at 41,075 tonnes -- around two days of global consumption -- after peaking at 117,900 tonnes on June 20.

Winter demand primarily for use in batteries has driven this latest push and technical factors appear to explain some of its recent strength, analysts said.

Copper was up at $7,070 against $7,000 at the London close, shrugging off recent concerns surrounding the U.S. economy that has put copper under pressure lately.

Traders would watch U.S. durable goods orders for further clues about the U.S. economy, due at 1500 GMT.

Zinc was at $4,510/4,510.5, up 1.5 percent against Monday's close of $4,445, while tin was down a touch at $10,625/10,650 versus its last quote of $10,650/10,700.

The strong metal prices bolstered shares in European miners with Antofagasta and Anglo American trading over 3 percent higher and Rio Tinto up over 2 percent on the London Stock Exchange.