Copper dropped around 3 percent on Monday as the demand outlook further deteriorated after the Japanese economy posted its biggest contraction in decades and inventories jumped. Copper for delivery in three-months on the London Metal Exchange fell as low as $3,326.50 a tonne and was at $3,338 a tonne by 1122 GMT, versus Friday's close of $3,430. "Japanese copper demand is likely to be hammered this year because the underlying economy is slowing," analyst Michael Widmer at BNP Paribas said. With demand for its cars and electronics waning, an unprecedented slump in exports saw Japan's economy shrink by 3.3 percent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974. Prices of industrial metals went into a free fall in mid-2008 as the global recession knocked down demand, with copper losing more than 60 percent of its value since hitting a record high in July. "Continued deliveries into LME warehouses show there is still spare metal out there, not being bought," Widmer said. "Demand is still extremely weak. We could still see further deliveries into warehouses." Inventories of copper, used extensively in wiring and construction, currently stand at 523,325 tonnes, their highest since late 2003 and having risen more than 50 percent since the start of the year. Some traders were unclear on the likely direction of prices. "I am a little confused," a Hong Kong-based LME trader said. "There is no doubt the global economy is in a recession but spot prices in China are stronger than we predicted and people are talking about uptrend momentum from the country's reserve buys." The trader said he believed copper prices had little chance of falling below $3,000 but should meet resistance above $3,800. NO UPTURN Market talk of Chinese State Reserves Bureau (SRB) buying copper and a jump in December copper imports buoyed prices over the last couple of weeks. However, analysts caution it may not be the start of a recovery. "Rather than reflecting a upturn in underlying demand, the record Chinese copper imports in December 2008 were driven by arbitrage buying, " David Wilson, analyst at Societe Generale said in a research note. "Although we adhere to the belief that the second half of 2009 will see an upturn in copper consumption in China, driven by the 4 trillion Yuan stimulus plan, there are few signs that this is impacting yet." Light metal aluminium dropped to $1,368 per tonne from $1,378 as data showed a massive jump of over 10,000 tonnes in inventories, bringing the total stocks to a record high of 2.94 million tonnes. Smelter officials and traders said that China is expected to reinstate a 5 percent tax on imports of primary aluminium, a move which could spur Chinese importers to cancel or delay tens of thousands tonnes of spot primary aluminium due to arrive in coming weeks. In industry news, Chinese trading group Minmetals offered to buy Oz Minerals Ltd, the world's No.2 zinc miner, for $1.7 billion, the second Chinese resources firm to come to the rescue of a debt-troubled Australian miner in a week. Key stainless steel ingredient nickel fell to $10,150 from $10,350 while zinc, used to galvanise steel, was down at $1,140 from $1,153. Lead fell to $1,155 from $1,170. Tin was lower at $11,100 from $11,350, despite exports from one of the top producers of the metal fell nearly 38 percent from the same period a year ago, trade ministry data showed on Monday.

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