Copper rallies to 3-week high on tight supply

NEW YORK/LONDON (Reuters) - Copper rallied to its highest level in three weeks on Friday, with a weak dollar and growing signs of supply-side tightness helping it extend a strong recovery from Monday's near 2-percent plunge.

The metal rose for a second straight week, with prices maintaining momentum above the 200-day moving average for a second day running. The ability to hold above the 200-day suggested the likelihood of further upside in the week ahead even as European debt problems and growth fears in top consumer China lurk.

"It looks like we have put in, at least, an intermediate bottom here," said Sterling Smith, an analyst for Country Hedging Inc in St. Paul, Minnesota.

"We've had four solid days. We've pushed up to an area where it's got to be beyond short-covering ... there's some longs coming in."

London Metal Exchange (LME) benchmark copper peaked at $8,433 per tonne, its highest since April 4, before going untraded at the close, and last bid at $8,415. It closed on Thursday at $8,322.

In New York, the active July COMEX contract rose 5.15 cents to settle at $3.8250 per lb, after moving between $3.7545 and $3.8305, another three-week high.

COMEX volumes topped 86,000 lots in late New York business, down slightly from Thursday's count of close to 115,000 lots, preliminary Thomson Reuters data showed.

After the close, U.S. Commodity Futures Trading Commission data showed money managers raised their bullish bets in COMEX copper by a mere 14 contracts in the week ended April 24, bringing their net long position to 2,217 contracts.

Stocks of the red metal in Europe, the United States and Asia have been falling as it is shipped to top consumer China, where still-stagnant demand means copper is piling up toward record highs.

Copper in LME-registered warehouses fell to their lowest levels since November 2008 at 251,825 tonnes, with cancelled warrants -- the metal earmarked for delivery -- at 39.5 percent of total stock. In Shanghai, copper stockpiles fell to the lowest since February at 204,762 tonnes.

"What we are seeing in stocks is supportive for prices. Cancelled warrants remain very strong, on the LME the market is still in steep backwardation and we are also seeing inventory draws," said Andrey Kryuchenkov, analyst at VTB Capital.

"This has helped copper push through the $8,200 level and the long-term range that we have had since January."

Copper remains plentiful in China, Standard Chartered said in a note, even as the seasonally strong second quarter gets under way. It estimates bonded inventory at 600,000 tonnes, and total Chinese stock near record highs around 1 million tonnes. China accounted for 40 percent of refined copper demand in 2011.

"(Local industry) expect domestic demand to continue its seasonal improvement going into May, mainly because air-conditioner production should rise and wire and cable demand is likely to improve," it said.

"However, no one sees a surge in demand from here. A seasonal improvement in demand will help reduce stockpiles somewhat, but we do not expect significant declines as downstream consumers remain cautious about buying on soft order books."

Copper prices received an additional boost from the dollar, which slumped to multi-week lows against the euro and other currencies after a report showed U.S. economic growth cooled in the first quarter, raising the prospect of further stimulus from the U.S. Federal Reserve. <USD/>

A softer U.S. unit makes dollar-priced commodities such as metals cheaper for holders of other currencies.

EURO ZONE WORRIES

Worries about the debt crisis in Europe kept gains in check after Standard & Poor's cut Spain's credit rating by two notches.

The downgrade has once again ignited fears over the euro zone with investors worrying whether countries such as Portugal, Italy, Greece and Spain, also known as the "PIGS" economies, would be able to service their massive pile of debt.

"Spain's rating downgrade by S&P late yesterday evening has destroyed the positive market sentiment which had prevailed yesterday," Commerzbank analysts said in a note.

Spain's sickly economy faces a "crisis of huge proportions", a minister said on Friday, as unemployment hit its highest level in two decades.

(Additional reporting by Silvia Antonioli; editing by James Jukwey and Dale Hudson)