Industrial metals fall as flu fears hit markets

* Large rises in aluminium, lead inventories but copper dips

* Economic downturn still hurts demand outlook

* Copper, zinc, nickel and lead slip more than 4 percent

LONDON, April 27 - Copper fell more than 4 percent before paring losses on Monday, as fears a deadly flu outbreak could reach pandemic proportions served a new blow to commodity markets battling economic turmoil.

Copper for three-months delivery on the London Metal Exchange closed at $4,350 a tonne from $4,470 a tonne on Friday but earlier hit a near three-week low of $4,252.

Battery material lead fell 6.5 percent to a day's low of $1,341.50 a tonne from $1,435 a tonne, and closed at $1,360. Nickel fell $175 to end at $11,375 from $11,550, and hit a day's low of $10,930 a tonne.

"Nobody knows what is going to happen with the swine flu," said Dan Smith, analyst at Standard Chartered. "People have got a bit optimistic in terms of risk-appetite, so we've seen a significant reversal of that in the last day or so."

"There have been quite a few positives in the market in terms of China, but the rest of the world has remained poor."

Fears of a global pandemic of swine flu, which first emerged in Mexico, grew over the weekend with new infections in the United States and Canada discovered on Sunday, and as millions of people in Mexico hid indoors to avoid a virus that has already killed more than 100 people.

A pandemic would deal a major blow to a world economy already suffering its worst crisis in decades, and experts say it could cost trillions of dollars.

European shares reversed earlier losses to offer some support later in the session, despite Asian stocks falling 2 percent on news of the flu outbreak.

"Investors in Asia are all the more aware of the potential damage after the outbreak of SARS in Hong Kong six years ago hobbled the city and regional economy, as well as flare-ups of bird flu in the past few years," RBC Capital said in a note.

Concerns about supply were reflected in the premium for cash over three-month contracts for copper.

"Stocks are falling rapidly and that is leading to tightness," said Robin Bhar, an analyst at Calyon. "It relates to the fact that there's a lot of material that's been cancelled and will leave the warehouses and be probably shipped to China."

He added that backwardation normally occurs in markets in a strong global economic environment, but the current anomaly in copper is due to a recent trend of demand from China.

COPPER INVENTORIES FALL

LME copper stocks fell by 4,275 tonnes to a three-month low of 425,275 tonnes.

Cancelled warrants - material tagged for delivery - stood at 67,600 tonnes, up from 65,800 tonnes on Thursday.

Market players widely believe the material is continuing a recent trend of heading for China. But worries linger that demand support from China may ease, and copper prices may come under pressure as markets approach a traditionally quiet season.

"Medium term, seasonally we're heading into a weaker demand period so you would expect prices to come back a little before an expected recovery before the end of the year," Standard Bank analyst Leon Westgate said.

Aluminium, used in transport and packaging, closed at $1,446 a tonne in LME rings from $1,457. Hitting the demand outlook, stocks of aluminium at LME warehouses continued rising, climbing 9,625 tonnes to a record above 3.7 million tonnes.

China's aluminium prices are expected to remain weak for the rest of the year as excess supply from resumed production capacity weighs on the physical market.

Tin ended at $12,400 from $12,600, while zinc eased 4.9 percent to a low of $1,350 from $1,420 a tonne but closed at $1,372.

Investors are also nervous about the release of U.S. bank 'stress test' results, a Federal Reserve meeting and a flood of earnings due later this week.

Metal Prices at 1611 GMT
Metal Last Change Percent Move End 2008 Ytd Percent move
COMEX Cu 197.50 -9.60 -4.64 139.50 41.58
LME Alum 1445.00 -12.00 -0.82 1535.00 -5.86
LME Cu 4365.00 -105.00 -2.35 3060.00 42.65
LME Lead 1360.00 -75.00 -5.23 999.00 36.14
LME Nickel 11275.00 -275.00 -2.38 11700.00 -3.63
LME Tin 12010.00 -590.00 -4.68 10700.00 12.24
LME Zinc 1370.00 -50.00 -3.52 1208.00 13.41
SHFE Alu 12540.00 -200.00 -1.57 11540.00 8.67
SHFE Cu* 34950.00 -320.00 -0.91 23840.00 46.60
SHFE Zin 11840.00 -270.00 -2.23 10120.00 17.00
** 1st contract month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07