Leading aluminum producer Alcoa (NYSE:AA) continues to flirt with new 52-week highs in the beginning of 2018. The stock's strong start to the year was made possible by a nearly 30% gain in December and 91% gain from the beginning to the end of last year. But don't think the near doubling in stock price wasn't earned.

Soaring aluminum prices allowed the company to post strong earnings during each of the first three quarters of 2017 and exit last September with a cash position of $1.1 billion, which management considers to be the "minimum" balance necessary to weather the next cyclical downturn. If current market conditions keep up for another year, then Alcoa's business could get even stronger and its rainy day fund even larger.

While there's some indication that 2018 could be a banner year for the global aluminum industry, analysts aren't entirely confident that's a slam dunk just yet. Will industry trends make or break Alcoa's chances at having its best year yet?

A small card of paper with a question mark on it sitting on a wooden table.

Image source: Getty Images.

Keep an eye on China -- and this

Developments in the East have been the driving forces in the aluminum market for the last two decades, although usually to the detriment of other global players. Case in point: China increased its share of global aluminum production from 11% in 2000 to 55% last year and sold into every regional market available along the way. But things may be changing.

In 2017 China instituted new environmental regulations aimed at improving air quality in its largest metropolitan areas. The result: annualized aluminum smelting capacity totaling some 3 million metric tons would be taken offline from mid-November to mid-March. Well, that was the intended goal, anyway -- but some analysts aren't so sure the country is meeting the ambitious target. Instead, some estimate that only 600,000 metric tons of annual capacity is temporarily off the market.

In either case, production data and selling price movements suggest the efforts are still having a positive effect. The International Aluminum Institute reported Chinese production fell 8% from October to November, while prices hit new multi-year highs in early January. But it didn't take long before prices began sliding, which has some worried about what's to come.

Chinese production could come back with a vengeance in mid-March, not only from restarting idled winter capacity, but also from new production capacity entering the market. It's also worth noting the country reported a record level of aluminum inventory in the waning months of 2017. Increased production and the potential for a glut of inventory-fueled supply could weigh on global aluminum prices and create headwinds for producers such as Alcoa in the year ahead.

Pallets of aluminum castings.

Image source: Getty Images.

While developments out of China will be the most significant drivers of the aluminum market, a new potential opportunity is emerging for Alcoa in 2018. Liberty House, a part of British industrial conglomerate GFG Alliance, recently announced its intention to become a major player in the global aluminum market. It started off 2018 by gobbling up Rio Tinto's aluminum smelter in Dunkirk, France -- the largest in Europe -- for $500 million. The group said it plans on investing $2.4 billion in the site, showing it's not afraid to make big bets on struggling assets. Even better, it's still eyeing other production sites across the globe. 

That could be good news for Alcoa and its shareholders. In the last several years the aluminum leader curtailed production across its portfolio to reign in costs and respond to weak market conditions. While more favorable selling prices are allowing some production assets to be restarted in 2018 and shortly thereafter, others are under strategic review. If Liberty House is serious about building a leading position in the market -- and all signs point to that being the case -- then Alcoa could find it easier to sell certain assets in the year ahead.

Investor takeaway

Investors will need to pay close attention to developments out of China, which will play the largest role in determining whether or not Alcoa has its best year yet in 2018. Considering the amazing performance last year, chances are the company's stock won't deliver another 91% gain in the year ahead.

That said, the aluminum producer is firing on all cylinders and continues to take advantage of a strong market to shore up its financial and operational flexibility. Investors will learn more about expectations for 2018 when Alcoa announces full-year 2017 results on January 17.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.