Briefing highlights
- There may be a pot shortage when it's legal
- Economy expands 3.5 per cent in third quarter
- OPEC agrees to production cut
- RBC posts dip in fourth-quarter profit
- If you missed it, a recap on pipelines
Pot shortage forecast
There may not be enough legal marijuana to go around in Canada when the recreational pot industry first gets up and running, analysts say.
Indeed, it could take until 2020 for supply to catch up to demand, according to Canaccord Genuity analysts Matt Bottomley and Neil Maruoka.
And to put it in business terms, that will “provide a pricing floor” of $8 a gram until production can ramp up to the levels needed by that date, they said in a stock report.
“The Canadian cannabis industry has experienced significant growth, fuelled in part by the near-term prospect of a legalized recreational market in Canada, which is expected to benefit current medical marijuana producers, and a growing level of acceptance of marijuana use internationally,” the Canaccord Genuity analysts said.
Their research comes as a task force on recreational use is poised to hand its report to cabinet.
As The Globe and Mail’s Kelly Cryderman writes, the report by the nine-person group will contain recommendations on everything from minimum age to measures to fight drug-impaired driving once Canadians can start buying pot legally, probably in 2018.
There’s now a “vast illicit market” in Canada, Mr. Bottomley and Mr. Maruoka said. If that’s brought into the legal realm, Canada could see demand of 400,000 kilograms in the first year and, potentially, retail sales of $6-billion by 2021.
“We believe there are a number of Canadian producers that are entrenched in the medical market today building the infrastructure to supply the recreational market,” they said.
“If legalized, we believe the industry will move to a wholesale model (which could pressure margins) and producers could realize wholesale revenue of C$4.8-billion by 2021, resulting in operating income of C$2-billion and free cash flow of C$1.4-billion,” the analysts added.
Okay, it’s pot, not potash, but it’s going to be a serious industry with startup issues when it gets off the ground.
“We believe the rigorous process of becoming a licensed producer of cannabis in Canada imposes significant barriers to entry,” said Mr. Bottomley and Mr. Maruoka.
“To date, Health Canada has approved 2 per cent of applications from growers seeking approval to supply the medical market,” they added.
“We estimate that a legalized recreational market in Canada will result in a shortfall of supply in the near term.”
Economy expands
Canada’s economy rebounded nicely in the third quarter of the year, bouncing back from a depressing period.
Gross domestic product expanded at an annual pace of 3.5 per cent, Statistics Canada said, driven partly by stronger energy exports.
Remember that the second quarter saw a decline in the wake of the Fort McMurray wildfires.
And here’s a key point from the Statistics Canada report: Business investment in residential real estate contracted after nine straight quarters of of strength, by 1.4 per cent.
“Ownership transfer costs (-5.7 per cent), which reflect movement in the resale housing market, contributed the most to the decline,” the agency said.
“A new tax on home purchases by non-residents in British Columbia came into effect in August, contributing to lower total ownership transfer costs.”
OPEC strikes production deal
Oil prices are shooting higher in the wake of a deal among OPEC members to cut production for the first time in about eight years.
The deal would see production trimmed by 1.2 million barrels to 32.5 million barrels a day, according to officials. Russia, which is not a member of the group, has also agreed to cut.
“So far, indications are that, even if we do get a cut, it will simply take us back to levels of output seen in May, and it does not take a technical analysis wiz to work out that that does not really change the underlying trend in OPEC production,” he added.
“And then there’s Russia, which has dropped hints about a supply cut, but has still to officially confirm this. As we head towards the end of the day, the deal looks to be a sure thing, but oil traders will be on the lookout in coming weeks for any sign that members are flouting the provisions.”
RBC posts dip in profit
Royal Bank of Canada posted a 2-per-cent drop in fourth-quarter profit, though capped a record year.
RBC earned $2.5-billion, or $1.65 a share, in the quarter, compared to $2.6-billion or $1.74 a year earlier.
On the year, the bank earned a record $10.5-billion or $6.78 a share, up from $10-billion or $6.73.
The industry “faces headwinds and an accelerating pace of change” going forward, but RBC is well positioned, said chief executive officer Dave McKay.
Pipelines approved
If for any reason you missed it, here’s a quickie recap of Prime Minister Justin Trudeau’s pipeline decisions after markets closed Tuesday.
As The Globe and Mail’s Shawn McCarthy and Jeff Lewis report, Ottawa approved the expansion of Kinder Morgan’s Trans Mountain line to Vancouver and Enbridge Inc.’s expansion of its main line into the United States.
However, Mr. Trudeau also killed the Northern Gateway proposal that would have run through the Great Bear Rainforest.
There’s also going to be a moratorium on crude tankers off B.C.’s north coast.