Canada / Analyst Insights
Top Five Heavily Regulated Canadian Industries Poised for Growth
by Ediz Ozelkan, Lead Industry Analyst and Olivia Ross, Industry Analyst
Mar 21 2019

Of the more than 420 Canadian industries IBISWorld covers, 48 are subject to heavy regulatory scrutiny. Each of these industries has its own supervisory characteristics in sectors ranging from manufacturing to mining. While regulation is typically viewed as an obstacle for economic expansion, the following industries are distinct due to their penchant for growth despite heavy monitoring from governmental bodies.

Their secret? Though still heavily regulated, the regulations these industries are subject to are not inhibitive of industry entrance. Government supervision in these fields is instead purposed to protect either consumers or the environment, rather than to restrict industry participation, thus spurring high levels of competition for industry newcomers and incumbents alike. IBISWorld believes it is this different cause for regulation that is a key contributor to these industries’ strong forecasted growth.

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Cannabis Production

A budding market, the October 2018 legalization of recreational cannabis consumption opened the doors for this industry to take root. The Cannabis Production industry in Canada (IBISWorld report 11141CA), which has received significant media attention since last year’s landmark legalization bill, is the latest addition to IBISWorld’s Canadian industry report collection. The bill’s passing doubled industry revenue in 2018, contributing to annualized growth of 102.7% over the five years to 2019. This is a key example of regulation that created an industry and cemented a strong customer base.

For example, the industry blossomed from a single government-sponsored provider of medical cannabis before 2013 to an anticipated 226 industry establishments in 2019. With over $1.5 billion in expected revenue this year, the few available cannabis providers have quickly gained market share with Aurora Cannabis Inc. leading the way with over 25.0% of the market.

While regulations requiring cannabis producers to register with Health Canada may slow industry participation and contribute to high barriers to entry, the industry’s growth prospects remain high, evidenced by an ongoing supply shortage as the fledgling industry catches up to demand.

Wood Pulp Mills

A constant target of international regulations, duties and tariffs, the Wood Pulp Mills industry in Canada (32211CA) is heavily regulated both domestically and abroad. Valued at nearly $10.5 billion in 2019, the industry is heavily reliant on export activity for expansion, with exports composing more than 90.0% of industry revenue. Accordingly, this leaves the industry susceptible to political concerns and the relative value of the Canadian dollar. Despite this, average profit margins are projected to double between 2014 and 2019 alongside revenue growth at an annualized rate of 6.7% due to supply constraints in China, a chief global competitor.

While longstanding regulations for effluent monitoring and a litany of other environmental constraints are the primary limitations for industry participation, other substantial barriers exist. With only 41 pulp mills nationwide, moderate and increasing market share concentration and established major players with extant distribution networks serve as additional barriers to entry. As a result, the industry landscape is characterized by high competition on a global scale and centralized production, with an estimated $256.0 million generated in each industry establishment.

Distilleries

Substantial regulation has not dampened revenue growth for the Distilleries industry in Canada (31214CA). The government’s primary means of intervention is through the control of liquor sales through provincial liquor boards that command high excise taxes and have thus prevented industry expansion. Provincial liquor boards set retail beverage price floors to limit the social harms of excessive alcohol purchases.

Furthermore, the Importation of Intoxicating Liquors Act has served as the general regulatory framework for alcoholic beverage producers, wholesalers and retailers nationwide. This act stipulates that all imported liquor must be checked by the resident liquor board of the destination province. In addition, the industry is further scrutinized by the Canadian Food Inspection Agency, Health Canada and Spirits Canada.

Despite such oversight, industry revenue is projected to increase an annualized 6.0% over the five years to 2019 to total $1.4 billion alongside a 20.9% annualized increase in enterprises during the period. This growth reflects industry operators’ ability to succeed even under the auspices of several provincial and federal regulatory bodies.

Gold and Silver Ore Mining

With an estimated $300.7 million generated from every industry establishment in 2019, operators in the Gold and Silver Ore Mining industry in Canada (21222CA) have struck gold. However, a myriad of factors has driven industry growth, which is projected to rise at an annualized rate of 4.9% over the five years to 2019. Chief among them is who controls mineral rights. In Canada, 90.0% mineral rights are owned by the government and must be leased from it. On top of several environmental concerns, there is separate mining rights legislation for every provincial and territorial jurisdiction except Nunavut.

In this landscape, the top four companies control just over 50.0% of industry revenue since they have the largest leases on mineral rights. Valued at over $9.6 billion in 2019, the industry is also reliant on commodity prices to dictate growth. The industry continues to expand, despite falling silver prices during the current period, due in large to the increasing production of gold to salvage value as mounting global economic uncertainty continues to ravage investors. Thus, regulation, while arguably strongest for this industry relative to the others mentioned in this article, was not a key demand constraint.

Generic Pharmaceutical Manufacturing

Posting healthy returns, the Generic Pharmaceutical Manufacturing industry in Canada (32541bCA) is anticipated to grow at an annualized rate of 3.7% over the five years to 2019 to total $5.6 billion. Generic medicine can sidestep much of the scrutiny that characterizes the pharmaceutical sector in aggregate, as such medicine is already chemically similar to its name-brand counterpart, which has already passed a lengthy inspection process and been on the market during its patent exclusivity.

Generic manufacturers must apply for a licence to produce a generic medicine; however, most are approved on the basis of chemistry. Accordingly, while industry entrance is not significantly inhibited by regulation, prices are. Since over 40.0% of all government health expenditures are destined for drug purchases, the government has a keen eye on keeping prices low. The Price Medicine Patent Review Board is the national regulatory body for pharmaceutical pricing and limits generic prices to between 25.0% and 40.0% of their brand-name counterparts. In some provinces, price requirements can dip as low as 18.0%.

In 2018, generic drugs were used to fill 70.6% of all prescriptions in Canada but only accounted for 21.8% of the $27.5 billion Canadians spent on prescription medicine, according to the Canadian Generic Pharmaceutical Association. Thus, generic prices are the primary barrier to more profound industry growth, although the government’s aggressive pursuit to lower drug prices has also benefited generics producers by making generic pharmaceuticals the first choice for all applicable treatments.

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Heavy regulation, heady growth

All of these industries demonstrate the nuances of government regulation as they pertain to growth. While government intervention is often understood as restrictive to growth prospects, some industries thrive within often-narrow parameters put forth by regulations. Strong consumer protections and high levels of competition are often the results of some form of government involvement, but a turn to pricing controls has in many cases promoted industry growth rather than throttled it. Even pricing controls in pharmaceuticals has opened up one of the largest markets in the world, the Canadian public health wallet.

Price floors for distilleries have encouraged industry entrance by guaranteeing profit. Cannabis legalization is laying the infrastructure for Canadian companies to dominate the worldwide market since other countries have been slow to legalize and will thus miss out on cultivating a distribution and production network that can satisfy future global demand.

Finally, protectionist policies for wood pulp mills have created an economic powerhouse that is so powerful that other countries are seeking control over it. Regulation is an important facet of operations in any enterprise and at the industry scale, understanding its complexities can be key to unlocking an industry’s potential.

 

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