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METALS-Nickel hits 14-1/2-month high, copper sags after China PMI

* China factory activity shrinks for 4th month-HSBC

* Tight supply continues to fuel nickel rally, up 33 pct this year

(Adds China PMI and analyst's comments; updates prices)

SINGAPORE, April 23 (Reuters) - Nickel raced to its highest level in more than 14 months on Wednesday as tighter supplies kept the rally going in the metal that has gained a third this year, while a sustained contraction in China's factory activity weighed on copper.

The impact of Indonesia's ban on exports of unprocessed mineral was felt sharply last month when the country's shipments of nickel ore to top buyer China fell to less than a million tonnes from an average of 3.4 million tonnes a month last year.

The Indonesian ban took effect in January, but arrivals of nickel ore into China only dropped sharply last month. In January, China's nickel ore imports from Indonesia, the world's biggest supplier, stood at more than 6 million tonnes before falling by half in February.

China uses laterite nickel ore to produce nickel pig iron used to make stainless steel. A shortage in nickel ore may curb supply of nickel pig iron which means mills may be forced to increase its use of the higher grade refined metal, supporting prices that have gained 33 percent this year.

"There are still around more than 20 million tonnes of nickel ore, but they are mostly held by big producers which can keep producing until September," said Peter Peng, analyst at CRU Group in Beijing.

"But some small nickel pig iron producers in northern China have been short of laterite ore since the middle of last month. We do see a 15 percent drop in China's nickel pig iron production this year," Peng added.

Three-month nickel on the London Metal Exchange hit a session peak of $18,525 a tonne, its highest since early February last year. It was up nearly 1 percent at $18,499 by 0340 GMT.

Also boosting nickel was the risk that the Ukraine conflict may disrupt supplies from Russia, the world's second-largest nickel producer, if Western powers impose more economic sanctions on Moscow.

"There are many speculators in the nickel market pushing prices higher to get profit and prices are rising even faster than real demand," said a Chinese trader.

The price of high-grade nickel pig iron has risen to around 12,000 yuan ($1,900) a tonne currently from 9,700 yuan in January, said CRU's Peng.

London copper dropped 0.3 percent to $6,650 a tonne after a private-sector survey showing a sustained contraction in China's manufacturing activity.

China's factory activity shrank for the fourth straight month in April, signalling economic weakness into the second quarter, although the pace of decline eased. The preliminary HSBC/Markit Purchasing Managers Index rose to 48.3 from 48.0 in March, but still below the 50 line separating expansion from contraction.

The most-traded July copper contract on the Shanghai Futures Exchange gained 0.3 percent to 46,640 yuan a tonne.

Hong Kong Exchanges and Clearing Ltd, which owns the LME, said it plans to launch copper, aluminium, zinc and coal futures contracts this year, its first foray into the fiercely competitive and burgeoning Chinese commodities derivatives market.

PRICES

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 = 6.2375 Chinese yuan)

(Editing by Muralikumar Anantharaman)