Stronger demand from China and reduced supply pushed copper to a more-than-two-year high, and the rally is expected to continue.

The weaker dollar is another big tailwind for the industrial metal. The dollar index was down 2.9 percent in July, and copper futures for September were up 6.7 percent for the month.

"A big reason for the rally: Production has been falling from last year's levels. This is a result of firms cutting capital expenditures after multi-year price slides," wrote BlackRock analysts.

The BlackRock analysts said they saw global economic expansion and good demand from China and emerging markets providing support for prices. There were also other developments, including a strike at more than 50 mines in Peru starting July 19.

"We see signs that reduced supply and increased demand may be more than temporary and are likely to help keep industrial metals prices stable from here. Metals and mining firms have been improving their balance sheets by reducing debt and decreasing investment in additional production capacity," the BlackRock analysts wrote.

China's manufacturing sector data cooled slightly, but the data was strong enough Monday to keep the rally going in industrial metals. Copper futures were up 0.6 percent to $2.89 per pound Monday, in U.S. trading.

"Constructive global macro data should keep the market excited for the next few months, but sell-off pressure may also build as the market moves into weak demand season," Citigroup analysts wrote. The third quarter looks set for a net draw, but the market could see a tight balance for the full year, the Citi analysts noted.

Bart Melek, head of commodities strategy at TD Securities, said copper could continue to rally but it could run out of steam later in the year. "If we break through the current levels here, there's a very robust resistance at $2.96," he said. Melek said under the right circumstances, it could go to $3.2745.

Larry McDonald, author of The Bear Traps Report blog, said he sees copper as very overbought in the short term. "It's a short term screaming sell, but the powerful dynamic going on that's positive is that China is dealing with potential trade issues with the White House and you've got this 19th Congress that's coming up in China," he said. McDonald said China's expected boost to infrastructure spending should help the commodity.

Melek said the market's positioning could make for volatile trading. He said there is record high long position of traders in CME futures and options, but at the same time there is a very large position of traders who are short and betting copper will fall.

"It could be volatile in either direction," he said.