Aluminium backs off recent high on choppy LME

LONDON, Dec 4 (Reuters) - Choppy aluminium backed off an earlier three-week high on Monday on the London Metal Exchange as Wednesday's option expiry looked set to create wide price fluctuations.

"The first part of the week could be volatile," analyst William Adams at BaseMetals.com said.

"On the one hand you have the option expiry (on Wednesday) and on the other, you have concern of supply tightness in some of the metals like nickel, tin and zinc," Adams said.

Aluminium futures <MAL3> traded at $2,800 a tonne in open outcry business, off an earlier 3-week high of $2,835 and down from $2,815 at Friday's close when prices rose over 2.5 percent.

The December option expiry has grabbed market attention as one market participant is holding between 50-80 percent of the available stock in aluminium.

Option expiry refers to the date when holders can exercise their right to buy or sell the underlying metals future at a specified price.

"The dominant position which built up in the cash market last week has forced backwardations in both the cash market and the front month," said John Kemp, Sempra Metals economist said in a note.

Backwardation normally indicates tight supplies and occurs when cash prices are higher than those of future contracts.

The backwardation, or premium for cash aluminium, was at $12 versus last week's contango - a discount for cash metal- at around $20.5.

As Wednesday's expiry approaches, the dominant position could cause a sharp spike in prices and some traders said aluminium could be $100 higher by Wednesday.

Analyst Stephen Briggs said fund money had been flowing to aluminium, generally seen as a laggard of the complex.

The metal has risen by 20 percent year-to-date, whereas nickel has surged by over 150 percent.

"There are so many players who just think it hasn't gone up much... they're trying to push it," Briggs said.

NICKEL, ZINC, LEAD SEEN STRONG

Supply tightness could spell further gains for other metals. Nickel <MNI3> sat near last week's new record high of $34,300 a tonne. It was last at $33,695/33,700 a tonne, down from $33,900.

Supply worries were reinforced after BHP Billiton said last week production at its Ravensthorpe nickel mine in Australia would be delayed to the first quarter of 2008.

"Nickel and zinc could easily shoot higher on the back of tight fundamentals," an LME floor trader said.

Zinc <MZN3> rose to $4,430/4,440 versus $4,400. Stocks in LME warehouses fell by another 375 tonnes to 84,825, their lowest in 15 years.

Lead may benefit from an upturn in seasonal demand for the metal which is used mainly in batteries. "The sales of car batteries during the winter could push lead higher," the trader said. Prices <MPB3> traded at $1,730 a tonne up from $1,690 and within sights of its contract high of $1,755.

Copper <MCU3> was little changed at $6,980 a tonne versus $6,975. Sentiment was dampened by the worse-than-expected reading of U.S. factory activity that showed the first contraction in 3-1/2 years and accentuating some traders' fears of a hard landing in the United States.

Trade in London's new "mini" metals contracts started slowly on Monday as the market watched volumes to gauge their popularity amid some concerns about the robustness of the trading software, traders said.