LONDON, March 4 (Reuters) - Copper rallied to a three-week high on Wednesday, as yet another drop in inventories provided a glimpse of hope for investors scouring the market for signs of a pick-up in demand in an embattled world economy.
Copper for three month delivery on the London Metal Exchange rose to $3,592 a tonne at 1051 GMT. The metal used in power and construction closed at $3,539 on Tuesday.
Copper stocks in LME warehouses dropped again, by 4,850 tonnes to just over 526,000 tonnes, notching up a fall of more than 22,000 tonnes since Feb. 25 and seemingly reversing a trend that had seen inventories more than double since October last year.
Also possibly signalling a pick-up in demand was the 64,400 tonnes of copper earmarked for delivery -- a jump of nearly 10,000 tonnes from the day before -- largely from warehouses in Asia but also significantly in Europe.
"The real drivers so far have been the strength of the physical market, particularly in Asia and the demand for copper in China which is evident from the cancelled warrants," Capital's Kevin Norrish said. Cancelled warrants are stocks already earmarked for delivery.
"There's a question over how much of this is being driven by the SRB buying and how much is being driven by real tightness in the Chinese market," he said, referring to China's State Reserves Bureau.
Norrish added that as copper appeared to be decoupling from equities, there was potential for an extended rally in the metal.
"With the short positions out there and the tightening up in near term fundamentals, there's potential for quite a sharp move up. $4,000 doesn't look crazy."
Later on Wednesday the market will be watching U.S. ISM non-manufacturing PMI data due at 1500 GMT.
CHINA BOOST
Copper was also supported by China's plans to boost spending, improving manufacturing data and comments from a sovereign wealth fund that it saw opportunities in natural resources.
China is the world's largest consumer of copper and news it will increase spending in areas including infrastructure and manufacturing also helped bolster sentiment.
"We forecast copper prices to be gradually better supported as we move into the second half of 2009, as a series of production cuts and China's fiscal stimulus packages are set to gradually boost metal off take," BNP Paribas said in a note.
Lifting sentiment, CIC, China's $200 billion sovereign wealth fund, said it saw investment opportunities in the natural resources sector given the steep decline in prices.
Lead for three-month delivery on the London Metal Exchange was at $1,120 a tonne, up from $1,075 a tonne at the close on Tuesday.
Prices in the battery material earlier rose nearly 5 percent in a technical rebound, helped by speculation the slowdown in Chinese manufacturing activity may have bottomed out.
Aluminium for three-month delivery rose to $1,340 a tonne from $1,315, while stocks in aluminium at LME warehouses rose 11,700 tonnes to a record nearing 3.3 million tonnes.
Key stainless steel ingredient nickel rose to $9,800 from $9,650, Zinc rose to $1,175 from $1,134 a tonne, while tin was a touch lower at $10,800 a tonne versus $10,850.
Metal Prices at 1051 GMT Metal Last Change Percent Move End 2008 Ytd Percent
