The illicit cannabis industry is expected to dominate recreational sales during the first full year of legalization in Canada, as legal producers continue to struggle with supply chain issues.

According to Scotiabank analysts, black market cannabis businesses will make up 72 percent of recreational sales in 2019. But that could drop to 38 percent in 2020 after temporary logistical issues get ironed out.

In the months since legalization came into effect, the licensed cannabis producers (LPs) “appears to be facing a temporary bottleneck rather than a supply shortage,” states the Scotiabank research note first reported on by Bloomberg. “[T]eething pains aren't over.”

The analysts predict the total demand for recreational cannabis will hit 900 metric tonnes this year, 646 of which will be met by the black market. Next year, that demand should go up to 1,100 metric tonnes, 415 of which will be met by illicit players.

While Canadian LPs are producing around 240 metric tonnes of product per month, they have 137 metric tonnes of “unfinished and finished inventory.”

And because of issues such as packaging and processing constraints and site inspections by Health Canada, “they have been unable to convert product to finished inventory and stock shelves.”

This is partly why the analysts cut their forecast for recreational sales across the country in 2019 by 30 percent. “We were clearly too optimistic on the time it would take for a nascent, bureaucratic industry growing a temperamental plant to ramp,” the analysts write in the note entitled “Resetting Expectations on Logistics Overhand.”

All of this is compounded by the limited retail presence in major provinces, particularly in Ontario, the country’s most populous province, which won’t have physical storefronts open until April. British Columbia, which has a reputation for being Canada’s weed capital, only opened one store at the start of legalization, and has been slow-moving since.

“Provincial sales data highlights the importance of physical retail stores in driving demand,” the analysts say.

Earlier this week, the Financial Post reported that licensed producer Aurora’s chief corporate officer told investors on an earnings conference call that “we need better retail infrastructure across the country to see the level of sale everyone is anticipating. It will take a couple more quarters.”

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