Copper recently reversed sharp price falls seen earlier this year, but fresh headwinds could push the metal lower in the second half, Capital Economics said in a note.
"We expect renewed weakness in the copper price later this year as mine supply picks up and Chinese copper imports continue to fall due to waning demand from financing deals," said Caroline Bain, senior commodities economist at Capital Economics.
A bumpy ride
It's been a rollercoaster year for copper. The red metal – which is used in everything from cars to houses – tumbled to a four-year low of $6,440/ton earlier this year as worries over a crackdown on the use of copper as collateral for financing deals in China – copper's largest market – prompted fears a supply influx could flood the market, pushing prices lower.
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However, concerns began fading in recent months, and prices rebounded accordingly, aided by a weaker dollar. Signs of stabilization in the Chinese economy, lower global copper inventories and slower growth in mine supply have been supportive as well.
However, some analysts warned investors not to get too excited by the rally, which has brought copper prices back up to $7,132/ton in recent days, as further gloom is in store.
Headwinds
A number of factors are set to knock copper lower including a pick-up in mine supply, helped by two new mines that became operational in Chile in June, Bain said. Additionally, Indonesia-based copper miner Freeport McMoRan just announced a preliminary agreement with the government suggesting exports could resume soon, following a disagreement over a hike in ore export taxes earlier this year.
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Meanwhile, on the demand side, Capital Economics expects concerns over the use of commodity-backed loans in China to resurface, weakening prices once more.
"This in turn could lead to an outflow of copper from stocks in China, removing any possibility of inadequate global supply," Capital Economics said. Their year-end forecast is $6,500/ton, around 9 percent below current levels.
Potential upside
Other analysts are more bullish on copper and said prices could be sustained if positive sentiment surrounding China's economy continues.
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"Whilst there is potential for a correction at some stage over the next few months we will see higher prices based on the outlook for China and secondly what looks to me a pretty encouraging outlook for the U.S.," said Ric Spooner, chief market analyst at CMC markets.
Spooner doesn't expect dramatic price rises, however, and acknowledged downside risks.
"The limits of my bullishness would be around $3.50 a pound ($7,000 per ton) in terms of Comex copper," he said, adding that an expected increase in copper supply this year should cap prices.
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"Currency is also a factor, right now we have U.S. dollar weakness which is supportive for U.S. dollar quoted copper prices, but the risk is that the market will begin to forecast a Fed (Federal Reserve) rate rise sooner rather than later, which could be another limiting factor, as it will create U.S. dollar strength," he added.
A bright new year
According to Capital Economics, the industrial metal's fortunes look brighter next year.
"We expect prices to start to recover in 2015 as stronger global growth boosts demand at a time of dwindling mine supply prospects from 2016," it said.
Their end-2015 forecast of $7,200/ton is above the $6,850 consensus.