* Demand sentiment drives base metals to new highs
* Falls in inventories underscore demand uptick
* Coming Up: U.S. vehicle sales data on Thursday
(Adds U.S. ISM data, updates prices)
By Michael Taylor
LONDON, April 1 (Reuters) - Copper hit 20-month highs on Thursday, starting the second quarter in an positive mood due to signals of improving demand in top consumers China and the United States and investor flows.
Benchmark copper CMCU3 on the London Metal Exchange traded at $7,870 a tonne at 1339 GMT from $7,780 at Wednesday's close.
The metal used in power and construction, earlier hit a peak at $7,939.75, its highest since August 2008, creeping towards the psychological $8,000 level.
The latest trigger was data from China, the world's largest consumer of industrial metals, showing its manufacturing sector picked up speed in March, pointing to brisk first-quarter growth that could spur further policy tightening. [ID:nTOE63001J]
"Sentiment is very upbeat, funds are buying and buying. I wouldn't call $9,000 but we will hit $8,000/8,100 in the second quarter - we could still have a seasonal pick-up in demand if China comes back, " said VTB Capital analyst Andrey Kryuchenkov.
News that the U.S. manufacturing sector expanded in March at its fastest pace in more than five years also supported sentiment, but traders said the data boosted the dollar and checked gains in industrial metals. [USD/] [ID:nN01144236]
A stronger dollar makes industrial metals more expensive for holders of other currencies.
"The OECD auto industry is recovering but we're still coming out of the crisis, we're not going back to the heydays of 2007 immediately. Stocks are still massive," said Kryuchenkov.
Falling LME inventories have helped sentiment in recent weeks, with copper stocks dipping 1,875 tonnes to 512,450 tonnes, having hit 6-1/2 year highs at 555,075 in mid-February.
Aluminium CMAL3 was trading at $2,350 versus $2,323 on Wednesday. Earlier on Thursday it touched $2,366 a tonne, the highest since mid-January.
LME stocks of aluminium, used in transport and packaging, are down more than 46,000 tonnes to 4.59 million tonnes, since a record high above 4.64 million tonne on Jan 21. <0#LME-STOCKS>
A large portion of those aluminium stocks are tied up in finance deals, to release cash for producers and to earn banks higher returns than in money markets. [ID:nGEE5BA277]
"Most people think that due to ... falling LME inventories, the prices are going higher -- but it's false," said Commerzbank analyst Eugen Weinberg. "It is very typical for bubbles, that the price reaction is being mistaken for fundamentals."
NICKEL Q1 STAR PERFORMER
Nickel surged 34.9 percent in the first quarter, outperforming other LME metals, on expectations of stronger demand from stainless steel mills. [ID:nLDE62U1VJ]
Three-month nickel CMNI3 hit a near two-year high at $25,714 a tonne earlier on Thursday. It last traded at $25,065 a tonne from $24,995 at the close on Wednesday. A series of strikes, project delays and production problems are expected to send the nickel market into deficit in 2010, the first time in four years. [ID:nLDE62L0X3] [ID:nSGE62I0A1]
LME nickel stocks hit a record high above 166,000 tonnes in early February and are now at 157,512 tonnes.
"Nickel production over the past few months has been performing much weaker than the rest of the base metals," said Gayle Berry, an analyst at Barclays Capital.
"This recovery in demand is only just getting going ... Declines that you see in stocks are likely to continue."
Investors are also keeping close tabs on LME data, which showed a dominant position controlling between 50-80 percent of cash warrants for both nickel, tin and lead. [LME/WC] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic on first-quarter price performances here For a TAKE A LOOK on nickel click [ID:nSGE62I0A1] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Battery material lead CMPB3 traded at $2,190 from $2,145 on Wednesday, having earlier hit near two-week highs at $2,224.
Zinc CMZN3 touched $2,434, its highest in more than two months, and was last at $2,396 from $2,375.
Tin CMSN3 traded at $18,475 from $18,450, having earlier hit $18,750, a level last seen since September 2008.
Metal Prices at 1422 GMT Metal Last Change Pct Move End 2009 Ytd Pct
move COMEX Cu 352.95 0.00 +0.00 334.65 5.47 LME Alum 2347.00 24.00 +1.03 2230.00 5.25 LME Cu 7857.00 77.00 +0.99 7375.00 6.54 LME Lead 2188.00 43.00 +2.00 2432.00 -10.03 LME Nickel 24975.00 -20.00 -0.08 18525.00 34.82 LME Tin 0.00 -18450.00 -100.00 16950.00 -100.00 LME Zinc 2391.00 16.00 +0.67 2560.00 -6.60 SHFE Alu 16650.00 75.00 +0.45 17160.00 -2.97 SHFE Cu* 62200.00 880.00 +1.44 59900.00 3.84 SHFE Zin 19245.00 450.00 +2.39 21195.00 -9.20 ** 1st contract month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07
(Reporting by Michael Taylor; Additional reporting by Pratima Desai and Maytaal Angel, editing by Keiron Henderson)
