METALS-Copper rallies on technicals, China supply tightness

* China's physical copper supply tight, boosting futures

* Copper prices at key technical support levels

SHANGHAI, July 9 - London copper rose nearly 3 percent on Thursday, while Shanghai copper rebounded from earlier losses, boosted by technical buying and tight physical supply.

Copper on the London Metal Exchange touched a two-week low on Wednesday as expectations of slowing demand growth prompted a broad commodities-wide sell-down.

Technicals are supporting copper prices, analysts and traders said.

"London and Shanghai are both supported by the 60-day moving average. London broke below the line in the previous session, but that can't be seen as confirmation that the direction has changed," said a Beijing-based trader.

The 60-day moving average for Shanghai copper stood at 38,431 yuan and that for London at $4,779.

Shanghai's benchmark third-month copper futures contract rose 1.1 percent to end at 39,420 yuan a tonne. The most-active contract for October delivery rose 1.3 percent to 39,370 yuan a tonne.

Copper for three-month delivery on the London Metal Exchange gained 2.7 percent to $4,845 a tonne, after sinking to $4,710 in the previous session, its lowest since June 23.

Some analysts attributed the gains to tight physical supplies in China.

"Physical copper supply is very tight. Some big trading houses are holding large amounts of copper, disrupting supply and pushing up prices," said Zhu Yanzhong, an analyst with Jinrui Futures.

Domestic prices would have to rise higher before the traders would be willing to release their stockpile in bonded warehouses, Zhu added.

But demand remains bleak during the summer lull. In China, premiums on spot refined copper cathode have halved in the past 10 days as bonded stocks swelled and import margins collapsed, traders said.

Doubts about a speedy economic recovery still hang over the market.

"The economic recovery is not going as smoothly as the market has expected and the process may take longer than expected," said Ying Haoliang, an analyst with Orient Futures Securities, adding that economic prospects, rather than market fundamentals, are now key in affecting metals prices.

Group of Eight leaders said the world economy still faced significant risks and it was too early to unwind stimulus measures until an economic turnaround is secure.

The record pace of lending from China's banks has also helped keep the market abundant with speculative money, analysts and traders said.

"There is plenty of liquidity in the market thanks to the government's easy monetary policy. And central banks around the globe are all sticking to similar policies, supporting the commodities market," said Zeng Chao, an analyst with Everbright Futures.

Chinese banks extended a massive 1.53 trillion yuan in new loans in June, but Beijing is concerned that bank credit could be inflating new stock and property bubble, and could sow the seeds of a new crop of bad loans.

"There's the concern that the government might tighten up the flow of credit, which would weigh on metals prices," said the Beijing-based trader. Base metals prices at 0701 GMT Metal Last Change Pct Move End 2008 Pct chg 09 LME Cu 4845.00 125.00 +2.65 3060.00 58.33 SHFE Cu* 39420.00 430.00 +1.10 23840.00 65.35 LME Alum 1555.00 5.00 +0.32 1535.00 1.30 SHFE Alum* 13395.00 -40.00 -0.30 11540.00 16.07 COMEX Cu** 219.65 4.85 +2.26 139.50 57.46 LME Zinc 1525.00 15.00 +0.99 1208.00 26.24 SHFE Zinc 13180.00 45.00 +0.34 10120.00 30.24 LME Nickel 15050.00 100.00 +0.67 11700.00 28.63 LME Lead 1615.00 5.00 +0.31 999.00 61.66 LME Tin 13225.00 -70.00 -0.53 10700.00 23.60 LME/Shanghai arb^ -693 Dollar/yuan 6.8318 \ 6.8342 ** 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