REFILE-Now good time to hedge base metal exposure-analysts

Wed Apr 13, 2011 9:53am EDT

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* Aluminium implied volatility lowest since end-2007

* Relative stabilty unlikely to continue

(Refiles to fix crosshead)

By Pratima Desai

LONDON, April 13 (Reuters) - Narrowing market price ranges suggest now may be a good time for consumers and producers to take advantage of the cheaper cost of hedging their exposure to copper and aluminium, analysts said.

Hedging or insuring using options -- contracts which give holders the right to buy or sell the three-month metal contract on the London Metal Exchange at a fixed price in the future -- now costs less because volatility has tumbled, for now at least.

The current lull could prove short-lived, providing a good window to pick up cover against future shocks.

"We've come from extreme volatility to a period of well defined ranges and relative stability," said Robin Bhar, analyst at Credit Agricole.

"It's unlikely to continue simply because there are a lot of uncertainties, geopolitics, the oil price and the nuclear crisis in Japan. There are so many unanswered questions, there are bound to be more surprises waiting round the corner."

Implied volatility is a measure of the probable range of prices in the future. It is part of the equation used to calculate the cost or premiums for options. The lower the volatility the cheaper the option.

For copper MCUIVc1 implied volatility is down at 22 percent, the lowest since late last December. In the aftermath of Japan's massive earthquake and tsunami in March, implied volatility rose above 30 percent.

"This is an opportunity to buy protection on the downside or upside in a market which certainly faces a lot of risks," said Dan Brebner, analyst at Deutsche Bank.

"Metals have been rangebound, but there has generally been an upward bias. For example with aluminium, prices have been rising, but percentage increases are decelerating, a classic environment for lower volatility."

For aluminium, implied volatility is around 18 percent, a level last seen at the end of 2007. On March 18 it touched 23 percent. Implied volatility is often traded on its own account.

ALUMINIUM

Benchmark aluminium CMAL3 on the London Metal Exchange has risen steadily since March 18. It touched $2,720 a tonne earlier this week, its highest since August 2008.

The metal used in transport, packaging and construction has been boosted by rising power prices, which account for about 35 percent of total aluminium smelting costs. [ID:nLDE72U13F]

Three-month copper CMCU3 on the LME has mostly traded in a range between $9,200 and $9,800 a tonne since March 16. It fell below $9,000 a tonne on March 15.

Copper hit a record high of $10,190 a tonne on February 15 as investors betting on expectations of a market deficit and higher prices this year piled into the metal used extensively in power and construction.

Rising oil prices have the effect of higher taxes on consumers and corporates and so could potentially curb economic growth, which would hit demand for industrial metals.

Brent crude oil LCOc1 at above $120 a barrel, is hovering near its highest since August 2008, partly due to worries about supply disruptions because of conflict in the Middle East. [ID:nLDE71O2CH]

Meanwhile in Japan the government has downgraded its assessment of the economy for the first time in six months to reflect last month's devastating earthquake and tsunami, which has triggered a major nuclear crisis and hit power supplies.

Many are concerned about the ripple effect on the global economy as Japan's manufacturing sector struggles. [ID:nTOPJP]

(Editing by Keiron Henderson)

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