METALS-Nickel at 3-1/2 month high as investors shift from zinc

* LME/ShFE arb: http://tmsnrt.rs/2oQ5nm2 (Adds comments, updates prices, changes dateline from SYDNEY)

LONDON, July 28 (Reuters) - Nickel prices hit a 3-1/2 month peak on Friday as investors shifted from zinc after a build-up in zinc inventories indicated that shortages had eased.

Rising physical demand from top consumer China also helped lift nickel.

Both metals are mainly used in the steel sector with zinc needed for galvanizing and nickel a key ingredient in stainless steel.

"Traders are seeing a weakening scenario for zinc because the market is not as tight as people expected while it's looking a bit more positive for nickel with Shanghai premiums rising," said Gianclaudio Torlizzi, partner at consultancy T-Commodity in Milan.

"After the very good run that zinc had in June, there's probably some profit taking and nickel is benefiting from a combination of short covering and some new long exposure."

Benchmark London Metal Exchange nickel was up 0.8 percent at $10,210 by 1030 GMT after touching $10,245, the highest since April 7.

ZINC STOCKS: On-warrant LME zinc inventories - those not earmarked for delivery and therefore available to investors - jumped 17 percent to 146,125 tonnes on Friday, having more than doubled in a little over two weeks. <MZNSTX-TOTAL>

Zinc inventories on the Shanghai Futures Exchange climbed 8.3 percent to 78,320 tonnes over the past week.

ZINC PRICE: Three-month LME zinc fell 1.2 percent to $2,766.50 a tonne after climbing 18 percent from June 7 until Wednesday, when it touched $2,857.

NICKEL PREMIUMS: Tight supply pushed up nickel full-plate premiums in Shanghai to $200-$210 a tonne this week from $180-$200 last week, Metal Bulletin reported, the highest since it began nickel premium assessments in 2011. http://bit.ly/2uEJCeZ

COPPER: Three-month LME copper dipped 0.2 percent to $6,315 a tonne after trading flat in the previous session. Torlizzi said the market was likely to continue to correct lower in coming days after its recent strong gains, with $6,100 a key support level.

TIN: LME tin added 0.3 percent to $20,710 a tonne after hitting a six-month high in the previous session on reports of smelter shutdowns in Yunnan province in China, the world's largest tin producer.

"Chinas largest tin deposits are in this province. However, if production is stopped for only a short time, the effects on tin supply should be limited and the price (would) correct again," Commerzbank said in a note. ($1 = 6.7463 Chinese yuan)

(Reporting by Eric Onstad; Editing by Susan Fenton)