New players in Uganda’s clay building materials industry are slowly being squeezed out of business by prohibitive credit terms, low levels of efficiency and limited market share.

Despite the consistent demand for clay building materials, particularly roofing tiles and bricks, backed by the construction boom of 13 per cent per annum in recent years — new local are finding debt financing a threat to their survival given the prevailing high interest rates.

However, according to John Wafula, chief executive of Uganda Clays Ltd, market experience and high production capacity are critical in acquiring a strong market position in the lucrative sector.

“We started small and we managed to build a solid production capacity. With no real competition, it was possible to make maximum returns, unlike now, when we have competition in the market. It is very difficult for small and less-efficient players to attain significant market share in a short time,” said Mr Wafula.

Uganda Clays is the oldest supplier of clay roofing tiles and bricks in the country with 60 years experience and over 70 per cent local market share.

The heavy debt obligations are driven by the high entry costs associated with the industry; intensive capital injections are required initially for purchasing machinery and vehicles for transporting bulk raw materials and finished products.

With few sources of long-term lending in Uganda and low levels of equity financing, most new entrants are forced to rely on ordinary commercial lending offered by local banks at exorbitant interest rates of 19-22 per cent, leading to mounting debt servicing expenses.

Though demand for clay building products is high, short-term revenue earnings still tend to be lower than the debt servicing costs, making the credit financing unsustainable, according to industry analysts. However, analysts also cite a lack of experienced and proven skills among the new players as a contributing factor.

Debt servicing problems have led to the closure of operations and slowdown in production of some promising emerging firms.

For instance, Lweza Clays Ltd was put under receivership last October after defaulting on a loan from Tropical Bank and failing to conclude a takeover deal with Uganda Clays which had been seen as the only option for clearing its mounting debt.

According to sources close to the failed takeover negotiations, Lweza’s indebtedness, overvalued assets and high levels of inefficiency discouraged Uganda Clay from proceeding with the takeover deal.

The latter was reportedly opposed to a valuation that combined the firm’s debt and asset base, preferring an asset-only valuation that provided a more reasonable estimate of its net worth.

Hence, the bank and Uganda Clay failed to agree on a suitable price, with the former insisting on Ush5.8 billion ($3.3 million) while the latter was only willing to pay Ush1 billion ($561.8 million), leaving the takeover deal in tatters.

Consequently, the troubled firm was put under receivership, and the receiver given powers to dispose off its stock to clear part of its debts.

However, the sale of the factory and other fixed assets is still on hold pending disposal of a petition filed in court against the sale by owners of the factory. The case is scheduled for January 27, 2009, according to a source close to the official receiver.

Another emerging player, Africana Clays Ltd, is also reported to have suffered a slowdown in production earlier this year, following the sale of a major production line to UCL at Ush1.04 billion ($564045), to service a bank loan coupled with disposal of some additional equipment for the same purpose. The action led to a marked reduction in output.

UCL’s current capacity is estimated at 50,088 tonnes per year, the largest in the industry.