Shanghai copper down 3.4 pct on rising supply

SHANGHAI, Jan 16 - Shanghai copper futures dropped 3.4 percent on Tuesday, weighed by rising domestic supplies, easing spot prices and losses in London.

The most active March contract was 3.4 percent lower at 52,270 yuan ($6,708) a tonne at the midday break on Tuesday.

"Copper supply in eastern China is abundant. We can see lots of copper ingots in warehouses, both domestic produced and imported," a spot trader in Shanghai said.

Spot copper prices in Shanghai were down 1,875 yuan, quoted between 54,950 yuan and 55,400 yuan.

Dealers expect trade to slow ahead of mid-February and Spring Festival celebrations in China, but activity may not pick up again following the holidays.

"There doesn't seem to be any great rush for copper, and although Chinese consumers are taking advantage of the positive arbitrage, I think they will stay on the sidelines and use scrap where possible," a London-based commodity trader said.

"That hand-to-mouth existence may well continue and to count on Chinese consumers returning after the Lunar New Year may be a little hasty."

Copper for delivery in three months on the London Metal Exchange was lower at $5,575 a tonne at 0411 GMT, from $5,630 at the close on Monday.

Copper stocks in LME warehouses rose 2,600 tonnes to 199,450 tonnes on Monday, more than twice their level at the start of 2006.

"The stock increases keep coming and I expect copper to remain under pressure. On the upside, we will be capped initially at $5,700 and then at $5,950." an LME dealer said.

"Personally, I expect copper to get to down $5,500 today. Prices have already slipped below $5,600 as Shanghai fell."

Copper prices have lost 12 percent in the first two weeks of 2007, while aluminium is down 4.5 percent.

Both metals are expected to extend their losses this year, but supply shortages mean nickel and zinc could revisit recent highs, a Reuters survey showed. [ID:nL15302191]

March Shanghai aluminium futures fell to 19,770 yuan from 19,890 yuan, while LME aluminium lost $20 at $2,680.

The LME cash to three-months spread was at around a $80/100 backwardation. On Monday it hit $110, the widest since 1997.

According to LME data, the market is dominated by one party which has built a position controlling some 70 percent of LME stocks, which total just over 690,000 tonnes. [ID:nL10156555]

However a short position of around 920,000 tonnes for the March 21 prompt date has also developed.

But bets on falling prices might prove costly, the commodity trader said: "Aluminium is a very strong story versus copper. It is looking very robust despite the growth we are seeing in Chinese production."

"Demand conditions are very strong in China in particular, and are set to remain so. Inventories keep getting lower and we are already below critical levels."

"We see downside risk fairly limited and if macro-indicators pick up, combined with growth in China, prices could get back above $3,000."

Nickel futures were down $100 at $33,100, after climbing 2.5 percent on Monday, aided by news that labour talks between Xstrata Plc and the union at its Sudbury, Ontario, operations have slowed. [ID:nN15237771]

 The premium for cash nickel above the benchmark futures
contract was around $2,000 per tonne, up over $1,300 since the
start of the year.
 Metal Prices at 0411 GMT
 LME Cu         5575.00        -55.00       -0.98
 SHFE Cu*      51640.00      -1900.00       -3.55
 LME Alum       2680.00        -20.00       -0.74
 SHFE Alu* &nbs