Copper cathodes at a port near Shanghai. Reuters
Surprisingly strong Chinese copper demand is prompting investors to rethink their dour predictions for the metal.
Copper consumption by the world's biggest user remains resilient even as China's economy cools and Beijing attempts to tighten access to credit, analysts say. Stockpiles of the metal in London Metal Exchange warehouses have fallen 50% since late June. Much of that copper has been moving to China, industry experts say.
Copper prices are up 7.1% from a three-month low reached in mid-November. On Friday, the most actively traded contract eked out a 0.1% gain to close at $3.3445 a pound on the Comex division of the New York Mercantile Exchange. The front-month contract fell 0.4% to $3.3785.
The increase has been partly driven by hedge funds and other money managers. Earlier this month, investors' bets on higher copper prices rose to their largest since mid-2011, according to the U.S. Commodity Futures Trading Commission, which regulates Nymex. Futures contracts outstanding on Nymex and LME are valued at $96.7 billion.
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Jeremy Baker, portfolio manager at the $732 million Vontobel VONN.EB -0.95%Belvista Commodity Fund in Zurich, said he may buy copper futures in coming weeks. He believes Chinese manufacturers will keep expanding, buying up copper from warehouses and new mines opening this year.
"We're seeing a bit of a manufacturing revival" in China and elsewhere, Mr. Baker said. "The potential surplus in the [copper] market can easily be eradicated."
The gains come as many analysts and investors had expected prices to be falling. A year ago, there were widespread predictions that rising mine production and a slower-growing China would lead to a yawning surplus of metal in the global market. China, which accounts for more than 40% of global copper use, posted a 7.7% rise in gross domestic product last year, down from 9.3% in 2011, according to the World Bank.
But China's cooling economy hasn't sunk its demand for industrial metals. Deutsche BankDBK.XE -0.57% says China's copper appetite increased 11% last year as companies ranging from power-cable makers to home builders continued to use copper products at a brisk clip. These companies ramped up despite slower growth in the broader economy and the Chinese government's efforts to keep a lid on credit. Many of China's biggest copper users are state-controlled companies, which are less reliant on the loans types that are the focus of the government crackdown.
Vontobel's Mr. Baker said the outlook is bright for copper's most important sectors. He pointed to State Grid Corp. of China, which is responsible for the maintenance and expansion of high-voltage transmission lines across most of China. The company plans to increase spending by 13% this year.
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State Grid of China plans to increase spending by 13% this year. One of its employees at work.Imaginechina/Associated Press
Most copper is used in electrical applications. Investors view changes in spending by State Grid as a proxy for how much wire the company will buy.
"The market has come to realize that physical demand is what matters," said Jean Marc Bonnefous, managing partner with London commodities hedge fund Tellurian Capital Management LLP. "The single-largest copper consumer in the world is the Chinese grid."
Analysts say copper's strength is further evidence that global manufacturing growth is on track despite investors' worries about the health of the global economy. Some economists see copper as a useful economic indicator because it is a component of many products essential to modern life, including plumbing and wiring in homes and appliances, automobiles and consumer electronics.
Deutsche Bank expects supply in the global copper market to exceed demand this year by 320,000 metric tons, less than half of the 750,000 ton surplus it expected at this time a year ago.
"The whole bearish story for copper last year was this wall of supply coming," said Mr. Bonnefous of Tellurian Capital. "That wall of supply has been met by higher demand from China." Tellurian began betting on higher copper prices in recent months.
Still, some aren't convinced copper demand is healthy enough to boost prices. Analysts say some of the metal making its way into China is bound for storage, not consumption, and mines starting production this year will send more of the metal into the market.
"There's still a lot of inventory out there," said John Pickart, chief investment officer at Pelagos Capital Management, which manages commodity-focused funds for investment manager Franklin Resources Inc. BEN +0.39% Mr. Pickart said his funds hold copper as part of a broad basket of commodities, but he isn't ready to add bets on higher prices until global metal stockpiles fall further and Chinese data confirm steady growth.
Write to Matt Day at matt.day@wsj.com and Tatyana Shumsky attatyana.shumsky@wsj.com"