(Adds comment, detail, updates prices) MELBOURNE, Aug 21 (Reuters) - London zinc rose to its highest price in a decade on Monday and nickel also rallied as investors ploughed into metals used by China's steel sector, seeing robust demand even as capacity is constrained by Beijing's drive to reform bloated industries. "Metals are pretty strong. The USD has been weaker and the Federal Reserve has turned a bit more dovish so that is supportive," said analyst Lachlan Shaw of UBS in Melbourne. Shaw noted that China's steel and aluminium markets could tighten with central government mandated cuts over the winter, although the aluminium cuts should be offset by rising Shanghai warehouse inventories. "Closing old and inefficient steel capacity in the 26 + 2 cities is set to cut production by 50 percent and aluminum by 30 percent, before mills and smelters elsewhere in China lift output to compensate," he said. "(This)... is driving positive sentiment right now."
FUNDAMENTALS LME ZINC: London Metal Exchange (LME) zinc hit the highest since October 2007 at $3,180 a tonne. Prices were up 1.7 percent at $3,176 at 0453 GMT. LME nickel, used in the stainless steel sector, rallied by 2 percent, having clocked in at its highest for the year.
* LME COPPER: LME copper edged up 0.4 percent to $6,513 a tonne, heading back towards last week's $6,580 peak, the highest since Nov. 2014.
* CHINA STEEL: China's iron ore futures rose for a third day on Monday, soaring more than 6 percent, fuelled by concerns of shortages of high-grade iron ore and before curbs on futures purchases come into force.
* SHFE: Shanghai Futures Exchange copper showed modest 0.3 percent gains. SHFE nickel rallied 4 percent while SHFE zinc was up 2.6 percent.
* JAPAN: Confidence at Japanese manufacturers rose to its highest level in a decade in August led by materials producers, a Reuters poll showed, a further sign of broadening recovery in the economy.
* ALUMINIUM: Cash aluminium has soared against the benchmark contract, reflecting a rush on immediate supply. Cash aluminium traded at a $9.50 premium against the benchmark, up from a $21 discount in early August. <CMAL0-3>
* CHALCO: The president of Aluminum Corp of China (Chalco) said that it had increased aluminium production in the first half of 2017 to take advantage of capacity cuts by private rivals, and would continue to raise production in the second half.
* COPPER: Limited access to the giant Grasberg copper mine in eastern Indonesia is expected to resume on Monday, its operator said, after former workers blockaded the site.
* COPPER: Protesters in Peru have removed barriers on a road used by MMG Ltd to move its copper concentrate from its Las Bambas mine to port for shipping.
* COMEX: Speculators in Comex copper boosted their record long position by 8,063 contracts to 120,175 in the latest week, regulatory data showed.
* AFGHANISTAN: U.S. President Donald Trump is eyeing Afghanistan's mineral wealth to help pay for a 16-year war and reconstruction efforts that have already cost $117 billion.
PRICES 0523 gmt
Three month LME 6514.5
Most active ShFE 51190
Three month LME 2090.5
Most active ShFE 16480
Three month LME zinc 3172.5 Most active ShFE zinc 26640 Three month LME lead 2389.5 Most active ShFE lead 19600 Three month LME 11190
Most active ShFE 91110
Three month LME tin 20365 Most active ShFE tin 144930 LME/SHFE COPPER LMESHFCUc3 492.43 LME/SHFE ALUMINIUM LMESHFALc3 272.44 LME/SHFE ZINC LMESHFZNc3 1216.81 LME/SHFE LEAD LMESHFPBc3 297.84 LME/SHFE NICKEL LMESHFNIc3 2100.44
(Reporting by Melanie Burton; Editing by Kenneth Maxwell and Richard Pullin)