UPDATE 2-Rate hike dents Shanghai copper; zinc limit down

(Updates prices to Shanghai close)

By Alfred Cang

SHANGHAI, June 10 (Reuters) - Shanghai copper fell nearly 1
percent on Tuesday after China tightened monetary policy by
more than expected over a long holiday weekend, and zinc
dropped by its daily limit on weak demand and arbitrage.

The most active Shanghai August copper SCFQ8 contract
slipped 680 yuan, or 0.9 percent, to 59,960 yuan ($8,662) by
the close. Markets in Shanghai and Hong Kong were shut on
Monday for a national holiday.

China's central bank on Saturday raised the amount that
lenders must hold in reserve by a full percentage point,
suggesting authorities are scrambling to prevent reconstruction
work after last month's earthquake from pushing up inflation.
[ID:nSHA289440]

"Investors have been talking about weaker-than-expected
copper demand in China for a long time. The rising bank reserve
requirement in China is the central government's gradual
measure to control investment growth which is having an impact
on metal consumption," said China International Futures analyst
Cai Luoyi.

London Metal Exchange copper for delivery in three months
MCU3 also fell 0.9 percent, or $70, to $7,910 a tonne.

MF Global copper expert Fred Demler said copper prices
would fall further in the third quarter as U.S. economic growth
slows, but a pick-up in copper demand could push up prices late
this year and into the 2009 first half. [ID:nN09468391]

Demler predicted copper falling to an average $3.36 a lb,
or $7,400 a tonne, in the third quarter, but picking up to an
average $3.45 a lb, or $7,600 a tonne, in the fourth quarter.

The gap in prices between the London and Shanghai copper
markets widened to 4,235 yuan from 3,394 yuan on Friday,
including Chinese value-added tax, well down from a record
6,549 yuan on April 18.

Copper inventories monitored by the Shanghai Futures
Exchange fell 13 percent, or 5,725 tonnes, to 38,829 tonnes in
the week to last Thursday.

In industry news, Australian miners Minara Resources Ltd
(MRE.AX: Quote, Profile, Research) and Newcrest Mining Ltd (NCM.AX: Quote, Profile, Research) said on Tuesday a gas
outage after a recent explosion at a supplier's plant would
impact their full-year production forecasts. [ID:nSYD117278]

Western Australia, where the two operate mines, supplies
about a third of the world's iron ore, 20 percent of the gold
and tens of thousands of tonnes of copper, nickel, zinc, lead
and other industrial staples.

ZINC SINKS

The key zinc futures contract in Shanghai fell by its daily
4 percent limit, pressured by weak domestic demand and by heavy
arbitrage-related selling as the market caught up with lower
London prices, traders said.

Shanghai August zinc SZNQ8 dropped 4 percent to 16,070
yuan, a contract low, before recovering a little to close at
16,085 yuan. LME metal MZN3 lost 2.4 percent to $1,935 by
0700 GMT.

An arbitrage opportunity, where investors sell in Shanghai
and buy in London, pushed down Shanghai prices to close to the
production cost of the metal in China.

"I'm forecasting further price decreases partly due to
heavy arbitrage last week, but the main factor is weak demand
and large inventories in China," said a trader for a major
Chinese smelter. "I think zinc prices will fall to about 15,000
yuan a tonne."

Shanghai zinc prices are down 15 percent so far this year,
while LME futures are off around 18 percent.

"The strong downside trend has initial weak support near
$1,980. A fall below this has the next strong confirmed support
level near $1,450," technical analyst Daryl Guppy said in a
note.

Metal Prices by 0700 GMT:
Metal Last Change Pct Move End 2007 Pct chg
08
SHFE Cu* 59960.00 -680.00 -1.12 56880.00
5.41
LME Alum 2925.00 -27.00 -0.91 2403.00
21.72
SHFE Alum* 18910.00 50.00 +0.27 18180.00
4.02
COMEX Cu** 361.15 0.00 +0.00 304.10
18.76
LME Zinc 1935.00 -48.00 -2.42 2370.00
-18.35
SHFE Zinc 16085.00 -595.00 -3.57 18950.00
-15.12
LME Nickel 21800.00 -150.00 -0.68 26350.00
-17.27
LME Tin 21600.00 -500.00 -2.26 16400.00
31.71
LME/Shanghai arb^ 4235
** 1st contract month for COMEX copper
* 3rd contact month for SHFE aluminium, copper and zinc
^ LME 3-m copper in yuan, including 17 pct VAT, minus SHFE
third month
($1=6.922 Yuan)