* Codelco says China demand firm; Europe has picked up * Miner expects tight supply-and-demand dynamic * Codelco to invest record $4.3 bln this year * Output seen dipping to 1.7 mln tonnes in 2012 By Alexandra Ulmer and Fabian Cambero SANTIAGO, March 6 (Reuters) - The world's top copper producer, Chile's Codelco, said on Tuesday it will invest a record of more than $4.3 billion this year and sees output dipping slightly in what it forecasts will remain a tight market, with firm demand from No. 1 consumer China. The state miner expects its output to dip to 1.7 million tonnes in 2012 from 1.735 million last year, before picking up sharply as of next year as new projects come on line. Codelco has several key projects planned as part of a long-term investment valued at about $17 billion to boost output to more than 2.1 million tonnes by 2020 and counteract dwindling ore grades. Codelco, which owns around 11 percent of the world's copper reserves, has also been battling labor strife, extreme weather and energy problems in Chile, which mines a third of the world's copper. The copper giant will boost investment 70 percent from last year, pouring money into more than 30 studies and projects to maintain its leadership. Among crucial projects are the $3.8 billion transformation of century-old Chuquicamata, the world's No. 1 open-pit mine, into an underground operation and the expansion of Andina, aimed at doubling that mine's output to around 600,000 tonnes per year. Chile boosted its overall mining investment estimate by 37 percent to around $91 billion by 2020, the mining ministry said separately on Tuesday, as robust growth in emerging nations buoys miners to increase production of key metals.Codelco's CEO Diego Hernandez said copper prices should hold near last year's levels if the market remains tight, adding China's copper market was firm. The metal, used in power and construction, posted its first annual decline in three years in 2011 when it lost a fifth of its value on fears related to the euro zone debt crisis and a global economic slowdown. Prices have recovered to gain around 9 percent so far this year, with three-month copper on the London Metal Exchange closing at $8,289.50 a tonne on Tuesday. "The demand-and-supply equation this year is going to be pretty tight," Hernandez told a news conference. Copper inventories in warehouses monitored by the Shanghai Futures Exchange rose to their highest in nearly a decade, data showed last week, suggesting oversupply in China. "This has happened in previous cycles and it didn't affect prices," Hernandez said. "We don't see any weakness in China yet, but we always have to remain vigilant." Chinese mainland consumers will likely use up the material, which probably will not be diverted to other markets, said Cesar Canali, head of metals for Latin America at Newedge brokerage in New York. On the fundamentals side, he said the market was chronically short of material and unlikely to tip into surplus. Hernandez said European demand had picked up in recent weeks and stronger-than-expected economic data in the United States suggested that market would help compensate for a potential sag in Chinese demand. He said Codelco had no plan to issue debt this year or exploit projects linked to lithium reserves. The state mining giant has held no new negotiations with global miner Anglo American amid a clash over a stake option, reiterating that a court battle remained the most likely route to resolve the dispute, he said. The mining titans have been embroiled in a bitter spat after Anglo preemptively sold 24.5 percent of its south-central Chilean properties, frustrating Codelco's bid to exercise an option to buy up a 49 percent stake in them.