The rush to build and expand cannabis production facilities for the newly legal market means some companies are absorbing extra costs for steel and aluminum due in part to American tariffs.
The tariffs – and the threat of them – have increased prices on steel and aluminum in Canada for months now. And with steel, a significant component in most custom-constructed cannabis facilities, now also changing from day to day in price, it’s left some marijuana growers having to eat the extra cost in order to meet what’s expected to be huge demand in the coming months.
The U.S. imposed tariffs of 25 per cent on certain Canadian steel products, and 10 per cent on aluminum, in May. Canada responded in July by adding its own set of surtaxes on some steel and aluminum products. And this month, the Canadian government announced a new surtax on imports of certain types of steel products, which will go into effect on Oct. 25. The two countries are in continuing discussions about the issue.
The tariffs and uncertainty that has come with them have added costs to cannabis construction projects that could factor into the companies' success as they face pressure to keep costs down due to competition from both legal and illegal growers.
Vassil Staykov, general manager of Richmond Cannabis Co., is nearing completion of his company’s 10,000-square-foot growing facility in Napanee, Ont. Construction began on the prefabricated steel building this spring and is expected to be complete before winter. He said the cost of building materials has increased 10 per cent since construction began. Mr. Staykov is also facing rising prices on bolts, rails and a key piece of equipment he needs for the facility.
“Everybody’s markups vary,” said Mr. Staykov, noting it’s often unclear if the increases are due to tariffs or because demand has increased. “It’s the cost of doing business.”
Since legalization on Oct. 17, distributors in several provinces have found that cannabis producers have shipped less product than expected. For new producers or those looking to expand, the rush is on to get projects up and running. Companies facing rising costs due to steel price fluctuations are not likely to start looking for new suppliers lest it delay their timelines, Mr. Staykov said.
“There’s so much demand for [steel building products] and everyone’s on tight timelines,” he said. “You don’t have the option to shop around. … It’s really difficult avoiding these tariffs when you are dealing with long lead-time contracts of high dollar value in a hyper-competitive and fast-moving industry.”
Unstable prices are also causing problems for builders. Hadi Feltham, based in Crossfield, Alta., works with growers as a consultant and also as an agent for Modus Structures, selling prefabricated steel buildings. He says steel prices have risen between 40 and 60 per cent over the past 11 months. While many companies would prefer to buy Canadian steel, Mr. Feltham said supply shortages can make it hard to come by, and prices have risen for both domestic- and foreign-made products.
In the past, a company such as Mr. Feltham’s could put a deposit down to guarantee the price. But this year, the price is now typically fixed when it leaves the steel yard, he says, meaning there’s no good way to budget ahead.
His company’s prices to build the frame, floors, walls and roof of a cannabis facility, not including any growing equipment, have gone from about $68 per square foot to $80 in the past year. The typical cannabis production facility is between 60,000 and 70,000 square feet, which translates into a cost increase of at least $720,000. Some buildings can be as large as 600,000 square feet, he added.
Despite the significant added costs, Mr. Feltham believes growers who have committed to steel buildings as opposed to greenhouses are staying the course because of long-term energy savings, increased production and reduced exposure to mould and mildew.
“For a greenhouse to operate [in a northern climate such as Canada], they have to augment their lighting and change their environment to meet the climate needs," Mr. Feltham said. "With our facilities, you don’t have to worry about what’s happening outside.”
Greenhouses, however, use significantly less steel. Beleave Kannabis Corp., which is building a greenhouse near Hamilton, Ont. and retrofitting a building in nearby London, often buys its steel materials from Poland and aluminum from Greece, according to chief operational officer Bill Panagiotakopoulos. The quality of product from those countries, he said, is high while their comparatively low wages keeps prices down – for now.
“More companies are going to start realizing it’s a better deal to go to Europe,” he said. “I expect the price will go up [as demand for European steel grows], but certainly not as much as buying from the U.S.”