* Higher prices, falling costs deter more output cuts
* High inventories could undermine some price rallies
* OPEC not expected to change output targets
By Karen Norton and Barbara Lewis
LONDON, May 20 (Reuters) - Production cuts and project delays have started to slow across a range of commodities as prices began to rally, but over-supply could still be a major issue for some metals.
Many producers were quick to reduce output in response to the deepest recession since the 1930s.
Producers of oil, which differs from other commodities in that it is dominated by OPEC, and some industrial metals were among the first to react.
But aluminium and nickel markets are still pressured by huge supply surpluses and analysts have said their rally from lows in recent months could be fragile.
"We need a demand-led reversal of cuts rather than a price-led one," said Stephen Briggs, a metals analyst at RBS Global Banking & Markets.
"Prices are looking too far ahead."
Commodities have been rising since early this year, supported by an unusually close correlation with equities markets, which are factoring in a return to economic growth that should fuel demand for raw materials.
The optimism is not necessarily based on evidence.
From a record of nearly $150 a barrel hit last year, oil prices collapsed to $32.40 in December. They have since rallied and on Wednesday hit a six-month high above $62.
The benchmark London Metal Exchange (LME) contract copper rose by 60 percent from end-2008 to $4,925 a tonne by mid-April, driven by substantial Chinese buying. But it remains far below the July 2008 peak of $8,940.
LME copper stocks are down almost 40 percent from February levels, mainly due to Chinese stockpiling, but also because of recurrent unplanned supply disruptions.
Zinc producers were unusually among the first to react to plummeting demand and cuts of over 1.0 million tonnes are deemed sufficient to prevent a huge build up in inventories.
But aluminium stocks are at record high levels of over 4.0 million tonnes, with no signs of that trend slowing, and nickel stocks are around 14-year highs.
"Aluminium producers need to cut more, but cutbacks are already slowing and will slow down even more," said Andrey Kryuchenkov, commodities analyst at VTB Capital.
Restarts of idled aluminium capacity in China, spurred by government and provincial stockpiling, have increased the surplus.
World nickel output may need to be cut by almost one-third, some analysts say, compared with reductions so far of around one-fifth.
For evidence of the slower rate of cuts, please see factbox "Mines and plants hit by low prices, high costs".
NO MORE OIL CUTS?
The oil rally has drawn support from record supply cuts from the Organization of the Petroleum Exporting Countries, which said it would reduce output by around 4.2 million barrels per day compared with production last September.
At its most disciplined, OPEC delivered more than 80 percent of the promised reduction, analysts said, but some estimates have shown compliance has begun to fall.
The group next meets on May 28 in Vienna and is widely expected to leave current supply curbs in place.
Inventory levels are still close to their highest for 19 years in the biggest energy consumer the United States, but demand there has begun to increase in the run-up to the driving season that begins later this month.
In addition to the OPEC supply cuts, international oil companies have delayed some of their most expensive projects.
The International Energy Agency, which represents the interest of consumer countries, has repeatedly said lower oil prices have had a major impact on investment in new production, which could lead to very strong price rallies in the future.
But major oil companies, led by the biggest Exxon Mobil, have said they will carry on investing through the downturn and falling production costs have meant that reduced capital expenditure will not necessarily mean less exploration.
Some also predict the industry could be moving towards fresh investment now oil prices are rising.
"While capex was expected to fall sharply at the beginning of the year with $40 oil, with prices above $55, tax reform in place and costs falling, it would seem more likely that spending will start to increase," said Lawrence Eagles of JPMorgan.
He also said he had yet to see the evidence any reduction in expenditure had been as drastic as predicted by some.
For the mining sector, the reduction in spending is deep. Analysts said that could support some metals prices, such as copper and zinc in the next two to three years.
Stockholm-based industry consultants Raw Materials Group (RMG) predicted exploration spending in 2009 would more than halve to about $6 billion from almost $14 billion last year.
"With the downturn in exploration this year, it means there'll be a lack of new projects further ahead," said RMG's Magnus Ericsson.
For a factbox on commodities cuts, click on (Karen Norton; edited by Peter Blackburn)