Companies hope for the German market

Toronto There are now cannabis shops on almost every street corner in the Canadian city of Toronto. And in some villages in the area there is no baker, but there is a shop that sells the drug.

Since Canada became the world’s first industrialized country to legalize recreational cannabis in 2018, a number of operators have poured billions of dollars into plantation construction and expansion.

But the initial gold rush mood led to large overcapacities. Canada produces more cannabis than it can consume itself. Despite the legal option, many customers continue to buy the cheaper goods from the black market. According to Health Canada, 468 tons of dried, unsold cannabis were destroyed last year.

The whole industry is making big losses. After the initial euphoria among private investors and investors, the share prices of the three largest Canadian cannabis companies Tilray, Canopy Growth and Aurora Cannabis have crashed in the last year.

When looking for export markets, companies are hoping for Germany: the planned legalization of recreational cannabis would be a great opportunity for growth. Industry experts expect demand in Europe’s largest economy could reach as much as 400 tonnes a year, four times what Canada would have in the first year after legalization.

Traffic light government plans legalization

Medical cannabis has been legal in Germany since 2017. Federal Finance Minister Christian Lindner (FDP) recently confirmed that the traffic light coalition also wants to allow leisure consumption next year. A bill is planned for this fall. Germany would be the first country in the European Union to approve the drug as a luxury food.

Canada is already the most important import country for medicinal cannabis for Germany. Sales could increase significantly as a result of liberalization: The Frankfurt-based Bloomwell Group, a distribution company for medical cannabis, estimates the market volume in Germany in the first year of legalization at 16 billion euros.

However, legislation could ban imports of Canadian cannabis for some time. Germany is bound by the 1961 United Nations Convention on Narcotic Drugs, which bans the import and export of cannabis for recreational use. According to experts, a renegotiation of the international treaties would take years.

“I am skeptical that cannabis grown in Canada will be imported to Germany,” says Justus Haucap, director of the Düsseldorf Institute for Competition Economics. “Instead, I think Canadian companies will invest and grow here,” Haucap said.

This means that Canadian producers would have to raise new funds to set up or expand new plants abroad, which will not be easy.

Vendors are closing factories and making losses

When Canadian companies set up their first factories in Canada, they were able to raise hundreds of millions of dollars in the stock market within a few years, thereby boosting production.

Now, however, companies are having to lay off employees and close factories in order to reduce overcapacity. Aurora, a provider with the claim to particularly high-quality products, wrote an annual loss of the equivalent of 0.5 billion euros in 2021. Competitor Canopy made a loss of €0.2 billion in fiscal 2022.

At present, equity financing for new factories seems unattainable, mainly as sentiment on the capital markets is deteriorating has cooled down dramatically this year. According to data from financial data provider Refinitiv, cannabis companies have only raised the equivalent of €27 million from stock sales so far in 2022, significantly less than the €2.1 billion in the previous year.

>> Read here: “Made in Germany”: Now domestic hemp is conquering pharmacies

The two companies Tilray and Aurora, which already produce medical cannabis in Germany, should have a head start. Only the German start-up Demecan, which bought its factory near Dresden from the insolvency estate of the Canadian company Wayland, has another production license.

According to Sascha Mielcarek, Tilray’s European director, the facility was built in Germany ready for rapid expansion. The factory could “double capacity in six to 12 months.” Tilray also owns a European distribution company and a second facility in Portugal.

In its last quarterly report, Tilray stated that it had a 20 percent market share in Germany. The company is “in a very good position” for larger investments in the country, said Mielcarek.

Takeover offers to German start-ups

In addition to its plant in Germany, Aurora has facilities in Denmark. The company also owns Pedanios GmbH, a wholesaler of medicinal cannabis in Europe. Aurora sees its “global and national experience as well-equipped to be successful” as soon as the time comes to open up the German market.

The company benefits from years of cooperation with regulatory authorities and markets throughout Europe. “If you understand how regulators work in Europe, that’s an advantage,” Aurora’s director for Europe, Axel Gille, told Canada’s Globe and Mail newspaper.

Demecan premises

The start-up is one of the few companies with a production license for Germany.

(Photo: Demecan)

Canadian companies are also likely to try to take over existing German companies. Constantin von der Groeben, co-founder of Demecan, reported on several offers in an interview with the Handelsblatt.

“Some want to buy us completely, others want to invest and set up a joint venture,” says the founder. “At the moment we want to remain independent.” According to the start-up, it could increase its current production of one ton tenfold within a year.

High energy costs make cultivation expensive

But future demand can hardly be satisfied with cannabis made in Germany alone. “It will be years before we have the capacities in Germany to even come close to covering the market,” said Bloomwell Managing Director Niklas Kouparanis.

It took more than four years for medical cannabis to be cultivated in Germany. Currently, the amount is only enough to cover 20 percent of the German demand for medical cannabis.

Kouparanis also considers Germany to be less suitable for planting cannabis. “If we grow in Germany, we have to be competitive with the black market in terms of selling prices.” This can only be achieved with large areas under cultivation, where production can be cheap.

This is difficult due to the high energy and wage costs in this country, says Kouparanis. “There are more opportunities in southern European countries like Portugal and Spain.”

Collaboration: Irene Galea

More: How the cannabis industry is preparing for the new billion dollar business

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