Aluminium backed off an earlier three-week high on Monday on the London Metal Exchange as Wednesday's maturing contracts set to create wide price fluctuations, traders said.
Aluminium for three-month delivery closed at $2,812 a tonne, off an early 3-week high of $2,835 and a touch below $2,815 on Friday, when prices rose over 2.5 percent.
"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."
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 December option expiry has grabbed market attention as one market participant is estimated to be holding between 50 to 80 percent of the available stock in aluminium.
"The dominant position which built up in the cash market last week has forced backwardations in both the cash market and the front month," Sempra Metals 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 $10 versus last week's contango - a discount for cash metal - at around $20.5.
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's quite a play going on to try and force it up even though the fundamentals do not justify that," Briggs said. Supply tightness could spell further gains for other metals. Nickel ended at $33,700 after spending most of the session just below last week's new record high of $34,300 a tonne. It closed at $33,900 on Friday.
Worries about shortage 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.
Traders think nickel will probably make a new record high before the year ends, while zinc, also boosted by LME stocks - 84,825 tonnes - at their lowest in 15 years could also test its all-time high of $4,580 a tonne.
Zinc added $45 to end at $4,445 a tonne from Friday's $4,400 close.
Lead gained from an upturn in seasonal demand from battery manufacturers. It closed at $1,739, within touching distance of its contract high of $1,755 set on November 8, up $49 from Friday.
"The sales of car batteries during the winter could push lead higher," a trader said. Copper ended higher at $7,000 a tonne from Friday's $6,975 close. Sentiment was dampened by a US manufacturing survey that showed the first contraction in 3-1/2 years, reinforcing market fears of a hard landing in the United States.
However, some analysts think that could be offset by China.
"(Chinese) growth remains resilient in spite of tightening measures by the government," UBS said in a research note.
Elsewhere, 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.
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