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Coronavirus outbreak impacts cannabis industry

Posted on February 18th, 2020 by Bill Weinberg and tagged , , , , , .

ChinaWith half a billion people under lockdown, the coronavirus outbreak in China is virtually certain to take a grave impact on the Asian superpower's economy—with ripples across the planet. And the cannabis industry is, like so many global concerns, dependent on labor in China's factory zones. Canna-businesses as far away as Canada's prairies are fearing an imminent pinch.

The scope of the crisis now facing China is truly staggering, and clearly poses a threat to the country’s generation-long thrust of prodigious economic growth.

By the Chinese government's own count as of Feb. 17, a total of 72,436 people are confirmed to be suffering from the COVID-19 coronavirus, while 1,868 people have died.

Restrictions on movement—from checkpoints at building entrances to total lockdowns of entire cities—now cover at least 760 million people, or more than half China’s population, according to a New York Times analysis of government diktats across the country.

Reuters puts the figure at 500 million people—pointing out that even this lesser sum is greater than the entire population of the United States and equivalent to about 6.5% of the planet's population.

The Lunar New Year holiday, originally set to run over a long weekend at the end of January, was extended more than two weeks in a bid to contain the virus. Now, factories are starting to come to life again—but with so much of the population under lockdown, at severely diminished capacity.

Moody's Investors Service on Feb. 18 lowered its growth forecast for China from 5.8% to 5.2% for 2020, predicting "a severe but short-lived economic impact, with knock-on effects for economies across the region."

Moody's cited supply chain disruptions due to slow-down of industry as a key factor threatening the economy. And the global cannabis business definitely stands to be impacted by such disruptions.

Vapes especially vulnerable
According to a Feb. 14 analysis by Reed Smith, the Pittsburgh-based global law firm: "The outbreak of a new strain of the coronavirus has impacted in one way or another many businesses across the United States and around the world. Cannabis- and vaping-related businesses are no exception. According to recent media reports, those businesses have experienced—or may experience—interruption in their supply chains as a result of the viral outbreak."

Almost all the world's vaping hardware is produced in southern China's factory zones. That includes the cartridges that hold the cannabis extract or other vaping product, the batteries that heat them, and the actual vaporizers.

Local inventories have already felt the pinch in places as far away as the Canadian prairies.

"It's really hard to get your hands on the 510 batteries manufactured in China right now because of the coronavirus," Mack Andrews, owner of the local Aylmer Nelson Cannabis store, told the Calgary Herald on Feb. 16. "Suppliers are having a hard time meeting demand."

Andrews said his store ordered a sizeable stock of the batteries before the crisis struck China, but was quick to add: "I'm not sure every store would have had that luck."

And this comes at a particularly bad time, as Alberta Gaming Liquor & Cannabis (AGLC) just approved the sale of cannabis vape pens on Feb. 7. All eyes in the industry are watching to how sales and supply roll out in the western province.

"There'll be some stores able to sell the cartridges but won't have batteries," predicted Andrews.

And provincial regulators agree. "We expect retailers will be able to begin ordering products as early as this coming week and there may be limited product from the onset," AGLC representative Angelle Sasseville said in seemingly guarded comments to CBC News.

Use of extracts, including for vaping, became legal for the adult-use market under Health Canada regulations that took effect last year. Sales of vape products began in Ontario in December, but there the online store run by the provincial government maintains a monopoly. In Alberta, they are to be available in privately owned brick-and-mortar dispensaries, making the province a key testing ground for what is being called Canada's "Cannabis 2.0" economy.

The crisis and China's cannabis contradiction
It's a peculiarity that this issue actually ties together two health crises on opposite sides of the world. The mysterious vaping-related illness over the past year claimed some 60 lives across the United States, and knock-off illicit-market vape pens appear a likely culprit in many of the cases. This poses a particularly strange irony, as many of these knock-offs are being produced in China for illicit operators in the US. So this is a case of Chinese capitalism exploiting American prohibitionism.

Another irony is China's ambition to get in on the "cannabis boom," providing hemp for the global CBD market—despite the fact that marijuana is more harshly proscribed in China than just about any other country in the world. The People's Republic continues to execute thousands every year for drug crimes—including for cannabis.

The southern province of Yunnan and the northern province of Heilongjiang are the country’s two top hemp producers, with Yunnan especially a seat of China's burgeoning cannabis industry. These are both outside the zone most impacted by the virus, in central China—with the very epicenter notoriously being Wuhan in Hubei province. As a New York Times page tracking the outbreak notes, Yunnan and Heilongjiang have seen comparatively few cases, and are also not under the harsh lockdown conditions being imposed in central and eastern China.

However, the impacted zone largely overlaps with China’s industrial heartland. So some of the cannabis operations in Yunnan and Heilongjiang are controlled by companies based in impacted areas. For instance, large operations in Yunnan are under Conba Group, a pharmaceutical company based in Zhejiang province—which has been very heavily impacted both by the virus itself and the lockdown measures.

China's share in the global CBD market may not be significant enough for the crisis in the country to have an impact there. However, CBD producers in North America and elsewhere relying on Chinese-grown hemp could also mean impacts on the industry.

Before the current crisis, there were fears that Trump's trade war with China could hurt the global cannabis industry. The first sign of a thaw in the dispute that has sent tariffs soaring came on Jan. 15, as Washington and Beijing signed an initial pact to regulate trade relations. That this came just a week before the lockdown was imposed in Wuhan is perhaps the bitterest irony of all.

Cross-post to Cannabis Now

Graphic: Perry-Castañeda Library Map Collection

 

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