* Cash/three month copper spread hits $12/T backwardation
* LME/ShFE arb: bit.ly/2wZSAEz
* GRAPHIC-2018 asset returns: tmsnrt.rs/2jvdmXl (Updates with closing prices)
By Eric Onstad
LONDON, June 8 (Reuters) - Lead prices slumped on Friday after inventories rose, a sign that shortages in China were starting to ease.
Copper retreated after a six-day rally that pushed the metal to its strongest in 4-1/2 years in the previous session as fears eased about a potential strike at top mine Escondida, an analyst said.
Benchmark lead was the biggest mover on the London Metal Exchange, closing down 2.7 percent in final open outcry activity at $2,466 a tonne.
LME lead had gained 14 percent when it touched the highest in more than three months at $2,555.50 on Thursday after rallying for slightly over a month.
The gains were largely fuelled by worries about shortages in China due to rolling environmental inspections on the secondary lead processing sector that resulted in some smelter closures.
But LME data on Friday showed a 19 percent jump MPBSTX-TOTAL in on-warrant lead inventories - stocks that are not earmarked for delivery.
That was due to holders of stocks reversing earlier decisions to take material out of warehouses, potentially to ship to China.
“Seeing those stock cancellations reverse is a sign that the pull from China (for metal) seems to be letting up,” said Oliver Nugent, commodities strategist at ING Bank in Amsterdam.
“We’re hearing that primary smelters (in China) are increasing utilisation rates and tightness in China is being relieved by whatever slack there is outside in the regional market.”
* COPPER: Three-month LME copper shed 0.3 percent to finish at $7,312 a tonne, off a session low of $7,211. Copper touched $7,348 on Thursday, its loftiest since January 2014, and has risen 5 percent so far this week, the most since mid-February.
* COPPER SPREADS: Many speculators had jumped on the bandwagon after wage talks at Escondida in Chile raised prospects of a strike at the world’s biggest copper mine, Nugent said. But that had largely been a convenient excuse for a rally and the main driver had been a tightening of spreads, he added.
The benchmark spread between LME cash and three months CMCU0-3 raced to a backwardation of $12 a tonne on Friday, the steepest backwardation since June 2016 and compared to a contango of $38.50 in mid-May. This would usually indicate a shortage of copper for immediate delivery.
“It does seem somewhat artificial, however, since the physical premiums do not suggest that conditions have changed. I suspect the market is getting wind of this, leading to a bit of a reversal today,” Nugent said.
* CHINA COPPER IMPORTS: Helping to cap losses was data showing China imported 475,000 tonnes of unwrought copper and copper products last month, the largest since December 2016 and the highest May figure for at least a decade.
* DOLLAR: A slightly firmer dollar index weighed on metals markets, making commodities priced in the greenback more expensive for buyers using other currencies.
* PRICES: Aluminium ended down 0.4 percent at $2,300 a tonne, zinc added 0.6 percent to $3,202, nickel dipped 0.6 percent to $15,420 and tin shed 0.5 percent to $21,225.
Additional reporting by Manolo Serapio Jr.; Editing by Mark Potter and Louise Heavens