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UPDATE 2-Chile's Codelco cuts 2003 copper sales

(Updates with market reaction)

By Louise Egan

SANTIAGO, Chile, Nov 29 (Reuters) - Chile's Codelco, the world's No. 1 copper producer, said Friday it will cut foreign copper sales by 200,000 tonnes in 2003 -- but not production -- to reduce high world inventories that sparked this year's price decline.

The 200,000 tonnes will be kept as inventories in Chile, said Codelco, the first major producer since the mid-1980s to announce it will carry inventories of its own.

The news was taken as a bullish sign, sparking a rally in copper prices in the London Metals Exchange but analysts said it underlined a bleak outlook for demand of the metal.

"Codelco has decided to reduce by 200,000 tonnes the sales of copper from its own mines during the year 2003," Codelco's Chief Executive Officer Juan Villarzu told reporters, reading from a statement.

"Given that it is not going to modify its mining plans nor its production, these 200,000 tonnes will be maintained as inventories within Chile," he added.

The move was seen as a potential boost to the copper market, which has suffered a prolonged price slump that closely followed a drop in equities prices. Copper, an industrial metal, is used in housing construction and automobiles so it often follows the fortunes of Wall Street.

The state-owned giant was one of several miners to reduce copper output this year amid price declines and increasing global inventories, which are currently near an all-time peak.

Despite a tepid market outlook for next year, it has repeatedly rejected the idea of continuing production cuts, which totaled 106,000 tonnes this year, into 2003. It plans to increase 2003 output by 100,000 tonnes to 1.645 million tonnes.

Villarzu said the new strategy is aimed strictly at reducing inventories, not boosting prices.

"We have no predictions of what impact it might have on prices. We are seeking stability in the market by way of the producers aiming to ensure there is neither an excess nor a shortage of inventories," Villarzu said.

Codelco plans to place the 200,000 tonnes back into world markets only when inventories have contracted to between 700,000 tonnes and 800,000 tonnes.

MARGINALLY POSITIVE

Daniel Roling, analyst with Merrill Lynch, said Codelco's move is marginally positive and warned that a strong economic recovery was needed to reach inventories of that level.

"It's a positive first step, but the problem is the market will know there's another 200,000 tonnes of overhang waiting to come," he told Reuters.

Metals traders in London said Codelco may be having trouble finding clients for its expanding output.

"The angle is that they are withholding because demand is minimal, they're not doing it for love," one trader said.

"It implies that the company is struggling to make their sales overseas and will stockpile metal," an analyst in London said.

Most analysts don't expect a significant drop in inventories next year, an assessment shared by Codelco.

Some analysts have called for another round of copper production cutbacks to stimulate the market. Codelco, because it is state-owned, is under pressure not to cut jobs or production levels which might hurt the Chilean economy.

Mining accounts for about 10 percent of Chile's gross domestic product, which is set to expand only 2 percent this year compared with average annual growth rates of 7 percent during most of the 1990s. (Additional reporting by Ignacio Badal in Santiago and Amanda Cooper in London)