Feb. 28 (Bloomberg) -- Copper reached a record high in London after Japan, the world's third-largest user, reported a bigger-than-expected increase in industrial production, signaling that demand for the metal may rise.

Copper for delivery in three months was up $41, or 1.3 percent, to $3,238 a metric ton on the London Metal Exchange at 10:36 a.m. It reached $3,275, the highest since the contract began trading in its current form in June 1986. The yen rallied, making copper cheaper to buy with the Japanese currency.

``Japan's industrial production in January is encouraging and that's driving copper higher,'' Liu Songtao, a trader at Dalu Futures Co., said from Beijing. ``If the dollar continues to slide, it's very likely we'll see copper trading at $3,500.''

Industrial production increased 2.1 percent from December, seasonally adjusted, Japan's Ministry of Economy, Trade and Industry said. Global copper use rose 7 percent last year to a record 16.4 million tons because of higher demand from China and Russia, exceeding new supplies by 579,000 tons, the U.K.-based World Bureau of Metal Statistics said in a report.

The benchmark copper contract in London had climbed as high as $3,260 on Feb. 22, topping a record set in January 1989. Prices for the metal, used in electrical wiring and power cables, have surged 41 percent since the start of last year.

Yen Rallies

The yen rose to 104.32 against the dollar, from 105.23 on Feb. 25, according to electronic currency trading system EBS. The euro was up 0.1 percent against the dollar to $1.3257.

``Copper is more a technical market than a fundamental market in recent weeks,'' said Kevin Tuohy, a trader at Man Financial in London. Funds are buying ``on the expectation that they are going to benefit from a lower dollar.''

Most of the five other metals traded on the LME followed copper higher. Aluminum, turned into beverage cans and car parts, rose $23, or 1.2 percent, to $1,914 a ton. It had fallen for two days from a 10-year high of $1,987.50. Zinc, used to coat steel, jumped $16, or 1.2 percent, to $1,396, lead climbed $5, or 0.5 percent, to $950 and tin was unchanged at $8,375.

Shares of BHP Billiton and Rio Tinto Group, which own stakes in the world's two largest copper mines, rose in London as the companies sought price increases for iron ore sold to steelmakers. Melbourne-based BHP, the world's biggest mining company, was up 11 pence, or 1.4 percent, to 779 pence. London- based Rio, the No. 3 mining company, rose 18 pence, or 1 percent, to 1,845 pence.

Rio and Brazil's Cia. Vale do Rio Doce, the world's largest iron-ore producer, last week won price increases of 71.5 percent from Nippon Steel Co., Japan's biggest steelmaker.

Electronics Gains

Japan's manufacturing gain was led by electronics companies such as Toshiba Corp., which use copper in wiring and components, and exceeded the median forecast of 1.5 percent from 26 economists surveyed by Bloomberg News. Industrial output rose 3.1 percent in South Korea, Asia's third-largest economy, the most in more than a year, that nation's statistics bureau said.

Japan unexpectedly slipped into recession last year for the fourth time since 1991 as export growth slowed and consumer spending stalled. The economy shrank at an annual 0.5 percent pace in the three months ended Dec. 31, the third quarter of contraction.

China and the U.S. are the world's two largest copper consumers. China's economy grew 9.5 percent last year and the U.S. expanded 4.4 percent, the most since 1999. Russia's economy grew 7.1 percent because of rising oil, natural gas and metals prices, the government estimated on Feb. 2.

Draining Inventory

Consumers have relied on stored metal as production lags demand. Inventory in LME warehouses has slid 88 percent since the start of 2004 to 53,975 tons, less than two days' global use.

Mining companies like BHP, Chile's state-owned Codelco and Phoenix-based Phelps Dodge Corp., the second-largest copper producer, are boosting output from mines including Escondida in Chile and Grasberg in Indonesia. Supplies from mines and scrap will rise 8.7 percent this year to 17 million tons, narrowing the gap with demand to 172,000 tons, Merrill Lynch & Co. forecast this month.

Hedge-fund managers and other large speculators increased their net-long position in New York copper futures by 34 percent in the week ended Feb. 22, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 27,718 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report.

To contact the reporter on this story: Xiao Yu in Beijing at yxiao@bloomberg.net .