* LME/ShFE arb - http://tmsnrt.rs/2oQ5nm2
* Exchange inventories still declining
* Zinc cancelled warrants on LME above 75 pct
* China data boosts sentiment (Recasts, adds comment, changes dateline from Melbourne)
LONDON, July 3 (Reuters) - Zinc prices hit its highest in nearly three months on Monday as the market fretted about shortages, dwindling stocks and expectations of strong demand from top consumer China.
Benchmark zinc on the London Metal Exchange was up 0.9 percent at $2,782 a tonne by 0956 GMT, having touched $2,795, its highest since April 6. Prices of the metal used to galvanise steel are up more than 10 percent since June 7.
"Zinc is in a strong position. The concentrate deficit from last year has moved downstream into an ingot deficit," said Macquarie analyst Vivienne Lloyd. "Stocks are falling and Chinese smelters have been forced to cut output because of a lack of feed (concentrate)."
SHORTAGES: Macquarie expects a 650,000 tonne zinc shortfall this year and sees prices breaching $3,000 a tonne by the fourth quarter of this year. Societe Generale's Robin Bhar is not so bullish and expects a deficit of 250,000 tonnes this year.
INVENTORIES: Zinc stocks in LME-approved warehouses at 289,275 are down more than 30 percent this year, while those monitored by the Shanghai Futures Exchange have tumbled nearly 60 percent to less than 65,000 tonnes. <CU-STX-SGH>
AVAILABILITY: A tighter LME market is exacerbated by cancelled warrants -- metal earmarked for delivery and so no longer available -- at more than 75 percent. <MZNSTX-TOTAL>
SPREADS: Worries about nearby shortages have narrowed the discount for cash over the three-month contract to near zero from $20 a tonne last month. <MZN0-3>
DEMAND: China accounts for nearly half of global zinc demand estimated at about 15 million tonnes this year. Its zinc output in May fell by 9.9 percent to 481,000 tonnes, which has contributed to consumers drawing down stocks.
CHINA: Industrial metals were supported overall by data showing June factory activity and new orders growing at their fastest pace in three months.
DATA: The market will be keeping a close eye on China's industrial production, investment, trade and property data over coming weeks for further clues on demand strength.
TECHNICALS: Traders expect strong resistance at $2,900, near March highs, and then the February peak of $2,980. Trendline support is a distance away at about $2,700.
DOLLAR: A lower U.S. currency this year has helped to underpin base metals prices because it makes dollar-denominated products cheaper for non-U.S. buyers, potentially boosting demand. The dollar index is down more than 6 percent since January.
PRICES: Copper slipped 0.3 percent to $5,917, aluminium rose 0.2 percent to $1,923, lead was up 0.9 percent at $2,311, tin climbed 0.1 percent to $20,020 and nickel gained 0.2 percent to $9,405.
(Editing by David Goodman)