* Weaker euro zone economy, China factory activity
* Shanghai copper stockpiles still near decade high
* Coming Up: U.S. new home sales, 1500 GMT
(Adds comment, updates prices)
By Manolo Serapio Jr
SINGAPORE, Feb 24 London copper erased
early gains to trade weaker for a third session on Friday as a
fragile global economy injected caution into the market,
although the modest losses meant the metal is still headed for
its best weekly showing in a month.
Copper is one of the best performing commodities so far this
year having gained 10 percent, although investors are finding
fewer reasons to stretch the rally with the European economy
heading back into recession and manufacturing activity in top
copper user China continuing to shrink.
Three-month copper on the London Metal Exchange
slipped half a percent to $8,350 a tonne by 0720 GMT.
Despite the drop, copper is still up around 2 percent for
the week so far, its biggest gain since the last week of
January, after a commodity-wide rally on Tuesday after Greece
secured its second bailout package.
"Technically, most (industrial metals) have now positive
technical momentum ratings but longer-term trend indicators have
remained largely neutral so far," Credit Suisse said in a note.
"This implies that the price path is likely to be bumpy with
occasional setbacks likely on the way up."
While Chinese physical buying interest for copper has been
largely slack since after the Lunar New Year break in January,
analysts say China's demand will likely stay firm this year,
particularly because of its electrification project which
comprises about 40 percent of domestic copper consumption.
"This will buttress demand in the event of a downturn
because it's a cyclical state investment plan in China that
transcends the short-term economic cycle," said Matt Fusarelli,
analyst at AME Group.
"If the world were looking at weaker circumstances, we think
copper will hold up better because of this."
Fusarelli said he expects copper to move "upwards of $8,800"
a tonne in the second quarter before easing off towards the end
of the year as new mines come onstream.
The most-traded May copper contract on the Shanghai Futures
Exchange fell 1.3 percent to close at 59,620 yuan
($9,500) a tonne.
News of renewed violence and work stoppage at
Freeport-McMoRan Copper & Gold Inc's vast Grasberg mine
in Indonesia due to an unresolved issue with the company failed
to lift copper.
SHANGHAI COPPER STOCKS DROP
The euro zone economy is heading into its second recession
in just three years and the wider European Union will stagnate,
the EU's executive said, warning that the currency area has yet
to break its vicious cycle of debt.
The weaker outlook in European and Chinese manufacturing
activity cut short copper's rally earlier in the week.
But traders said the fact that losses had been modest meant
there is underlying strength in the market, which could be well
spurred by any sign of pickup in Chinese demand.
Underscoring weak Chinese physical demand, stocks in
Shanghai warehouses hit their highest level in nearly a decade
last week, and dropped by just more than 1,000 tonnes to 216,086
tonnes CU-STX-SGH this week.
For graphic on global metals stocks, click:
Base metals prices at 0720 GMT
Metal Last Change Pct Move YTD pct chg
LME Cu 8350.00 -40.00 -0.48 9.87
SHFE CU FUT MAY2 59620 -800 -1.32 7.70
HG COPPER MAR2 379.25 -1.35 -0.35 10.38
LME Alum 2270.75 -2.25 -0.10 12.41
SHFE AL FUT MAY2 16160 -65 -0.40 1.99
LME Zinc 2048.00 0.00 +0.00 11.00
SHFE ZN FUT MAY2 15805 -60 -0.38 6.83
LME Nickel 19999.00 -1.00 -0.01 6.89
LME Lead 2153.25 -11.75 -0.54 5.81
SHFE PB FUT 15990.00 90.00 +0.57 4.61
LME Tin 23999.00 -196.00 -0.81 24.99
LME/Shanghai arb^ 1891
Shanghai and COMEX contracts show most active months
^ LME 3-month copper in yuan, including 17 pct VAT, minus SHFE third month
($1 = 6.2985 Chinese yuan)
(Editing by Sugita Katyal)