Shanghai, LME copper up, market eyes Chile strike

By Nick Trevethan

SINGAPORE (Reuters) - Shanghai copper rose almost 1 percent and London futures gained early on Monday, buoyed by worries that supply problems, most notably a strike in Chile, will stretch limited warehouse inventories.

The July copper contract the most active on the Shanghai Futures Exchange, gained 600 yuan or 0.93 percent, to 64,800 yuan ($9,266) a tonne by 0207 GMT.

"There is some reverse-arbitrage activity developing in Shanghai after the price gap between Shanghai and London widened," said analyst Cai Luoyi at China International Futures.

But he added there was a risk that dealers who sold metal on the international market, gambling on slowing Chinese demand, could face a squeeze if London prices continue to advance.

The gap between London copper and the Shanghai market narrowed to 5,794 yuan from a record 6,549 yuan on Friday, including Chinese value-added tax -- enough for merchants to divert China-bound shipments to London Metal Exchange warehouses.

Dealers said that over the next month or two, Chinese copper imports could fall 20 percent as consumers use up cheaper domestic supplies and shun the world market.

But Chinese consumers would not be able to stay out of the market indefinitely and their return could herald a sharp rally and take London Metal Exchange copper up towards $10,000 a tonne.

"Any absence by the Chinese will be fairly short term and the London Metal Exchange price at around $8,600 seems to suggest that markets remain tight," said Gerard Burg, an analyst at National Australia Bank.

"The first step will be to push copper to above $9,000. In the short term $10,000 is too far, too fast, but if we get through the $9,000-barrier, then a five figure copper price looks likely."

On Monday, copper for delivery in three months on the LME rose $50 or 0.6 percent, to $8,620.

"In the short term I am a little bearish, but the strike in Chile is supportive for the moment, but it won't keep going forever," a dealer in Tokyo said.

"I am not sure the fundamentals truly support prices above here, but after seeing what is happening in oil, anything possible."

Oil prices have set a series of record highs this year, leaping above $117 a barrel and gaining over 20 percent this year.

Copper hit a record high of $8,880 a tonne last week, up 33 percent in 2008, as investors fretted about supply disruptions, and those worries remained high as a strike at Codelco's Andina and Salvador divisions in Chile kept the operations shut for a fifth day, and briefly interrupted its Teniente operations.

In Zambia, the state power utility asked copper and cobalt mines to scale back operations as it plans a 48-hour shutdown at a major plant for maintenance and in Kazakhstan, the government is considering taxing metals exports.