China’s aluminium fluoride (ALF3) industry has had several troubled years, and 2012 is proving to be no exception.

The industry is plagued with serious over-capacity, and has been ever since the explosion in smelter capacity saw ALF3 producers all rush to the bank for expansions and acquisitions. That was in 2007, and the problems in the industry started at that time.

To the end of March this year, China has produced 159,000 tonnes of ALF3. If we deduct 30,000 tonnes of exports in the same period, then use a consumption rate of roughly 25kgs per tonne of metal, that’s enough ALF3 to support somewhere between 5 and 5.3 million tonnes of primary metal. According to the CNIA, China produced 3 million tonnes of aluminium in the first two months, so it’s a safe bet to extrapolate to 4.5 million tonnes by the end of March.

That means China’s ALF3 producers have running well ahead of the market. The consequence has been falling prices. Domestic prices have fallen US$150 or about 10% so far this year.

The unfortunate thing for the ALF3 industry is that even though supply is ahead of demand, the industry is currently running at only about 50% utilisation.

The local industry has decided to take action to save itself. At a meeting held recently in Jiaozuo, Henan Province (which happens to be home to DFD, China’s biggest producer), it was agreed to cut production further, to only 30% utilisation.

At that rate, China’s ALF3 producers will churn out only about 32,000 tonnes, or enough material to support 1.3 million tonnes of primary metal.

It’s difficult to measure inventory levels in an opaque market such as this, but they are sure to fall in the next two months - if producers hold their nerve. Their principle threat comes from their own individual desire to return to full operations and start making money. Any sign of a pickup in demand from China’s smelters could test their resolve.

It’s a bitter medicine, but perhaps not bitter enough. Until capacity utilisation rates return to a reasonable level on a permanent basis, the industry may well find itself having to take more bitter medicine again in the future.

For buyers in the international market, now may be a good time to take early delivery, or at least to secure your price level for the rest of the year.