(Reuters) - Copper rose on Friday, boosted by tighter Chinese physical supply and on improving sentiment and risk appetite after German Chancellor Angela Merkel's public support for the European Central Bank's efforts to fight the euro zone debt crisis. Chinese physical copper is trading at a 350-400 yuan premium to futures prices, lifted by bargain-hunting and tighter scrap supply, said state-backed metals research unit Minmetals Futures in Friday's note. "Some buyers are also stocking up after a recent tolling scheme tax adjustment (in China) makes it cheaper for copper smelters to export. They fear being caught short in the future, especially at times when the arbitrage window is shut for imports while, at the same time, smelters export to take advantage of the higher overseas prices," it added. The only way for a smelter to avoid China's export tax on copper is to be registered as a "toll' smelter, with permission to import copper raw materials and then export the finished metal tax-free. Merkel's call for swifter integration of fiscal policies among euro bloc members also stirred hopes that decisive action would be imminent, while grim comments from China officials on the country's economy increased expectations for stimulus there. "Merkel's comments gave the markets some hope and those who have been looking for opportunities to buy in did that," said a Shanghai-based trader. Three-month copper on the London Metal Exchange was up 0.8 percent at $7,509 per tonne by 0741 GMT, following a 0.9 percent gain in the previous session, and is on track to post a 0.3 percent rise on the week. LME aluminum rose 0.5 percent to $1,851, bouncing up from a three-year low of $1,827.25 hit on Thursday. Traders attributed the volatility to the metal's weak fundamentals and its susceptibility to panic selling. Some traders warned that climbs in base metals may be short-lived, however, with a stronger dollar .DXY and weaker Shanghai equities .SSEC compounding lingering fears over a slowdown in the global economy. A stronger greenback makes dollar-denominated commodities more expensive for holders of other currencies, while Shanghai equities are key to Chinese investment sentiment. "We are not out of the woods yet as copper is not on a clear uptrend, but is just rangebound, with many bearish factors still threatening to push prices down," said a Shanghai-based trader with an international firm. But for now, some fresh longs have entered the market, encouraged by Merkel's support for ECB President Mario Draghi's crisis-fighting strategy on Thursday. Merkel also pressed her European partners to move swiftly towards a closer integration of fiscal policies, saying time was running short. Recent comments from China's government stirred hopes for more policy action to stimulate the economy. China's trade outlook for 2012 is worsening, darkened especially by growing problems in Europe, the Commerce Ministry said on Thursday as it revealed the longest run of falling inward investment growth in the world's top metals consumer since the 2008-09 global crisis. All eyes will be on an upcoming round of shuttle diplomacy among euro zone leaders in the run-up to what could be a crucial month in the 2-1/2 year debt crisis. The most active December copper contract on the Shanghai Futures Exchange closed the session 0.8 percent higher at 54,660 yuan ($8,600) per tonne and ended the week up 0.1 percent. Shanghai nickel, aluminum and zinc may have also received a boost from talk that the Chinese government may be stocking up on these metals while they trade near their marginal production costs, traders said. Hit by slowing economic growth, China's smelters are lobbying the government to revive a state-run scheme to stockpile industrial metals that would support prices and possibly lead to a surge in imports, industry sources said on Thursday. "We heard that stockpiling for nickel may already be underway," one trader said. ZINC UP ON TIGHT ASIAN SUPPLY LME zinc rose 0.8 percent, bouncing off a 1-1/2 month low hit in the previous session, on bargain-hunting and tight supplies in Asia. "Zinc appealed to buyers today after being oversold yesterday," said the trader with an international firm, referring to the contract's 0.9 percent loss on Thursday. Singapore traders said zinc premiums in Asia (excluding China) had jumped to $90-$100 from $40 two weeks ago as a lot of metal in the region was tied up in financing deals or behind long queues at warehouses. "If you queue up at a Malaysian warehouse now, you will only get your zinc ingots in mid-October," one of them said.

Source