Despite a rise in diamond prices, which should benefit smaller mining companies in the short term, there needs to be an upturn in global consumer spending for a sustained recovery, RBC Capital markets said in a research note to clients yesterday.

Global consumer spending is not likely to pick up until 2010 at the earliest, it said.

“In the meantime, we expect further consolidation among juniors and recourse to unique funding structure of the sort arranged between Kinross and Harry Winston,” RBC said.



According to RBC, rough diamond prices have firmed in the past month with rises of 5%-10% in some categories. But it warned investors should not read too much into recent strength in rough prices.



"A temporary shortage of rough diamonds resulting from production and sales cutbacks by major mining companies has led to a small pick-up in prices. But this is off a low base and it is not a start of a new rising trend," RBC said.



“Firmer trending rough diamond prices need growing offtake at the retail end in jewelry stores around the world, and notably in the US, Europe and Japan. This still appears some way off with US consumer confidence still near a record low with similar conditions in other major markets.



“Diavik's decision to halt diamond production for two six-week periods this year will add further impetus to a reduction in inventory in cutting centers. This will contribute to a stronger rise in rough prices when final jewelry demand recovers.



“The reduction in Diavik diamond mine’s output is also, we believe, further evidence that the large diamond producers are unable to move rough diamonds in volume into a credit-strapped market at present, RBC said.



A near-term risk to prices will be the pace at which Russian diamond producer Alrosa looks to sell down the inventory it is building in a depressed market, it said.