Copper - which bounced back after suffering its biggest one-day loss in over a year on Wednesday - may extend its gains as stockpiles held in inventories in Shanghai decline. Still, analysts warned the recovery may prove vulnerable if data from the world's second-largest economy continue to show slowing economic momentum.
Benchmark three-month copper on the London Metal Exchange (LME) ended at $6,848 a ton on Thursday versus $6,795 on Wednesday when it slid 3.7 percent in its biggest one-day loss in over a year.
ANZ commodity analysts say copper's recent price weakness stems from two fronts - concerns over Chinese demand, which the bank believes "could be over warranted," and rising stockpiles.
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Copper stockpiles in London Metal Exchange warehouses "are breaching 10-year highs and showing no signs of abating," ANZ analysts said in a report on Monday. "However, a declining trend in Shanghai copper stockpiles could be the catalyst for a potential price recovery. Shanghai copper stocks have fallen 12 percent in the past month [3 percent last week] and may be hinting at stronger seasonal demand."
Dominic Schnider, head of commodity trading at UBS AG's wealth management unit in Singapore told CNBC's "Asia Squawk Box" that copper may revisit $8,000 a ton possibly within the next four weeks.
Daily data showed LME stocks fell by 1,950 tons to 617,650 tons, though they remain near their highest in nearly a decade, Reuters reported. In Shanghai, however, data last week showed copper stocks fell by 2.9 percent week on week to 217,180 tons, their lowest since early March.
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China's April preliminary import report releasing on May 8 may offer better clarity of the trend of declining China copper stockpiles.
Despite some guarded optimism, copper bulls have a tough road ahead of them given the scale of the global inventory overhang. According to estimates of the International Copper Study Group (ICSG), a 417,000 ton supply surplus looks set to accumulate on the global copper market this year, just marginally less than was expected in October, Commerzbank said.
And in 2014, the ICSG believes that the surplus will expand to 681,000 tons, primarily on the back of a sharp rise in production - mining supply is set to grow by around 5.5 percent each year in both 2013 and 2014.
That explains why Credit Suisse commodity analysts are taking a bearish view on the metal, saying moderated global demand growth of no more than 4 percent this year together with higher mined supply will increase market surpluses.
"This fundamental shift signals a pending retreat in prices to the lower part of the $6,000-9,000 band in which copper has spent most of its time since 2006," Credit Suisse said in a May 2 report. "Another indicator of this much better supply performance comes from latest Chilean mine supply data, which continue to show 2013 monthly output well ahead of previous years."
Still, Jonathan Barratt, founder of commodities newsletter Barratt's Bulletin noted spot market premiums for physical copper in China against the front month Shanghai futures contract. That reflects appetite for the metal despite the decline.
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"This gives us a bit of a clue that we're coming to a low," Barratt said on Monday. "We've seen some good orders and we've also seen some good fund orders as well. So I think everyone is starting to think we're getting close to some fair value."
Copper futures on the Comex division of the New York Mercantile Exchange are finding support at $3 a pound, Barratt said. "We're already at base levels so we're happy to hold."
Credit Suisse, however, favors entering short copper trades though admits timing the entry to a short position – or bets that prices fall – and managing risk is "somewhat problematic at present, with the added risk of a physical squeeze that could shift the front end of the curve up."