* Aluminium implied volatility lowest since end-2007
* Relative stabilty unlikely to continue
(Refiles to fix crosshead)
By Pratima Desai
LONDON, April 13 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.
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.
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)