METALS-LME copper hits 1-week high, physical shortage underpins
* Chilean port strike curbs metal shipments
* LME copper backwardation to persist on physical shortfall -traders
* Coming up: U.S. Philly Fed business index at 1500 GMT
SYDNEY, Jan 16 (Reuters) - London copper hit its highest in more than a week on Thursday due to a supply shortfall in physical markets, but prospects of aggressive action by the U.S. Federal Reserve to curb stimulus capped gains.
Strong U.S. data and upbeat earnings from Bank of America helped offset worries of a slowdown in the world's largest economy that had been triggered by last week's disappointing payrolls report, swinging the focus back to the possibility of a further roll back in the Fed's bond purchases.
"The main theme is that we'll see a more hawkish stance from the Fed moving forward. In line with that we'll continue to see a strong dollar which will place downward pressure on commodities prices - including metals," said analyst Tim Radford of Sydney-based advisor Rivkin.
Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, earlier this week cautiously endorsed further cuts to the Fed's bond-buying programme.
Three-month copper on the London Metal Exchange advanced to $7,370 a tonne, which was its highest since Jan. 8, before easing to $7,330 by 0703 GMT, mostly unchanged from the previous session.
The most-traded April copper contract on the Shanghai Futures Exchange climbed 0.5 percent to end the second session at 51,720 yuan ($8,600) a tonne.
Cash copper prices have traded at a premium against the benchmark contract since December, ending at $28 on Wednesday and reflecting a market distressed by a lack of supply.
"The copper market is tight - LME stocks are at one-year lows and the Chilean port strike hasn't helped," a Singapore-based trader said. "We're likely to see the backwardation continue."
Several Chilean ports are on strike, curbing metal and other shipments from the world's top copper producer.
However, more metal is expected to flow into markets as the year unfolds, given plentiful mine production and lucrative fees won by smelters to process copper.
Rio Tinto recorded big increases in production of iron ore and other minerals it sells mainly to China. Refined copper output from the Anglo-Australian company's Kennecott Utah Copper unit rose 19 percent in 2013, while mined copper was up 29 percent.
Three month LME copper
Most active ShFE copper
Three month LME aluminium
Most active ShFE aluminium
Three month LME zinc
Most active ShFE zinc
Three month LME lead
Most active ShFE lead
Three month LME nickel
Three month LME tin ($1 = 6.0460 Chinese yuan)
($1 = 6.0460 Chinese yuan)
(Editing by Himani Sarkar and Joseph Radford)