After falling by almost 20 percent earlier this year, copper prices have rallied over the past two months, helped by an uptick in Chinese economic activity. However, analysts warn the rebound may be short-lived.
"Copper still looks like a market moving into oversupply," David Wilson, director of metals research and strategy at Citi, told CNBC on Wednesday.
"We've had very good supply growth so far this year. For the major miners, production numbers are up around 8-to-9 percent, which is far higher than we thought and we've seen significantly fewer losses on the supply side than we'd usually statistically allow for."
Copper prices have rallied to $7,238/t (per ton) in recent weeks, helped by an upturn in both Chinese demand and business activity in developed markets. This comes after a rout earlier this year saw prices drop from $8,305/t in mid-February to $6,600/t in June. Nonetheless, copper prices are far off their 2011 highs, when the metal hit $10,000/t.
Goldman Sachs commodities analysts Max Layton, Roger Yuan and Jeffrey Currie said in a research note that the medium-term bear case for copper was clear cut.
"Although Chinese and developed market economic indicators have improved, this has not been significantly out of line with our base case for copper demand. Our base case outlook remains for solid but unspectacular global copper demand growth, with limited upside risks, " Goldman Sachs said on Tuesday.
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Goldman said that most of the risks for copper came from highly leveraged corporate balance sheets and weak new project starts in China, plus the prospect of weaker demand from the euro zone over the next 6-to-12 months. It forecast that prices would grind lower over the next 3-to-12 months, a view that was shared by Citi's Wilson.
"The underlying demand story is positive, but it doesn't suggest a surge in prices and we're seeing very strong supply growth, that is the key issue," Wilson said.
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"What everyone forgets is that the price story of copper over the last five years has been a supply constraint story, rather than a strong demand story. Now we're seeing a release of that supply restraint. Also people tend to forget that copper supply comes in waves every 8-to-10 years, partly because of the nature of developing supply projects."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt