Cannabis oversupply in Canada may be closer than some expect, bank warns

One of Canada’s top banks acknowledged the adult-use cannabis industry’s rocky start but still expects to see “substantial growth” for the rest of the year as supply constraints are alleviated.

Scotiabank also warned that the cannabis market will become heavily oversupplied in the medium to long term.

“Producers we have spoken to are generally aware that the industry will eventually be oversupplied, but there is a degree of complacency since few think the market will become oversupplied any time soon or that they will be the ones unable to sell their product,” analyst Oliver Rowe wrote in the report.

“We understand why producers have overbuilt, but that doesn’t change the fact that not all this capacity will be needed.”

Export volumes are not expected to meaningfully offset oversupply.

“While several sources have indicated undersupply will last three to five years, the data suggest otherwise,” the report noted.

The report is not overly negative, and the bank remains bullish on the nascent industry.

Scotiabank called Canada’s early adult-use cannabis sales “disappointing” – even acknowledging its estimates were too optimistic – but the bank said that’s reflected in deferred demand growth.

Legal cannabis sales this year could reach 259,000 kilograms (570,997 pounds), according to its estimate, which is four times higher than the total for 2018.

The report cited the potential of cannabis to offer “widespread disruption.”

Canada’s well-capitalized marijuana businesses should be able to tap into business lines such as:

  • Export for new medical markets.
  • Ingredients in food and beverages.
  • Topical sprays and creams.
  • Pharmaceutical products.
  • Medical applications.

The bank said regulatory trends are moving toward partial or full legalization, both in the United States and globally.

“In our view and if regulations permit, the U.S. recreational market (CA$50 billion or more) and international medical markets – CA$3 billion to CA$12 billion – offer the most lucrative future opportunities,” Rowe wrote.

Other industry catalysts include:

  • More health insurance covering medical cannabis.
  • ‘Transformational’ mergers and acquisitions.
  • Clarity in Canada over post-legalization sales.
  • The introduction of edibles and beverages.
  • Improved distribution channels expanding the market size.

Risks abound, however, including:

  • Possible inaccurate market-size estimates.
  • A persistent illicit market.
  • Pricing pressure from increased competition.
  • Regulations not keeping pace with industry growth in other countries.
  • Unfavorable regulations.

Rowe offered this important caveat: “If producers can’t deliver on promises in the Canadian market, we think the probability of them delivering globally will be reduced as well.”

In the report, the bank initiated coverage of Aurora Cannabis, CannTrust, Hexo and Organigram.

Matt Lamers can be reached at [email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *