Two things copper price bulls are choosing to ignore

Copper price is losing touch with huge supply growth and cost of production.

Spot copper prices are up nearly 10% since hitting near two-year lows lows at the end of July.

Sentiment in the industry has been buoyed by better economic news from China which accounts from more than 40% of global demand, a stronger US recovery and what appears to be the beginnings of a real turnaround in Europe.

With Chinese imports jumping 8% in July to a 14-month high of more than 400,000 tonnes, premiums paid for copper in China reaching a record $200 per tonne, and global LME copper inventories dropping 15% since the start of July and Shanghai stocks at 11-month lows, it hasn't been hard to find copper bulls.

Glencore's chief in charge of copper, Telis Mistakidis, commenting on the commodities giant's H1 results out last week said he expects the market would only improve in the second half:

"Consumption is a lot better than people generally give it credit for, purely because of the scale of people consuming today. China is consuming, India is consuming. You didn't have that when Escondida was developed in 1995. You had the US and Europe that's half a billion people, now you better add another zero to the back of that in terms of what consumption is."

But Canada's TD Securities warns in a new note that the copper market's upside potential is limited from current levels.

China's copper market is already in backwardation meaning the price of copper for immediate delivery is higher than future-dated shipments and that the supply squeeze may be short-lived.

Another danger sign is that today's copper price levels reflect the highest cost of production says TD Securities adding that the price is "more likely to correct than to rally."

On Tuesday, the red metal was changing hands $3.34 a pound or more than $7,300 a tonne – well above the marginal costs for copper producers which are in the $6,000 – $7,000 a tonne range or roughly $2.75 – $3.15 a pound.

Another negative for the market is that supply has been strong this year and is expected to grow substantially, further widening the copper market surplus.

Macquarie Research said last week major copper producing regions have provided an uninterrupted period of supply
growth in the past 18 months.

Outages at Freeport's Grasberg in Indonesia and Rio Tinto's Bingham proved short-lived and at Anglo American's Los Bronces complex supply was up 13% in Q2 versus last year, while Antofagasta's Esperanza and Freeport's Tenke-Fungurume also showed double digit output gains. Glecore Xstrata's African copper production was up a whopping 42% year on year, while Barrick increased its output 23%.

Next year supply growth could reach 7% year on year, the highest rate in a decade.

The top 10 copper mine expansions – half of which are greenfield projects led by the massive new Mina Ministro Hales in Chile and Rio Tinto's Oyu Tolgoi – will alone contribute more than one million tonnes of news supply in 2014.

Macquarie Research: Copper cost production premium vs other base metals