To hear them describe it, steelmakers' best days of the recovery are behind them - the future's looking dim as demand dries up. Is it just more sandbagging? Or, do investors actually need to worry? It's probably more the latter than the former, though a deeper look may answer the question.

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Earnings Wrap-Up
Overall, steelmakers have little to complain about with the second quarter.

ArcelorMittal (NYSE:MT), for instance, swung back to a profit in the second quarter of this year; the EBITDA number of $3.0 billion was easily better than the $1.22 billion from the same quarter a year earlier. The earnings figure was in line with what analysts were expecting.

It wasn't just ArcelorMittal posting encouraging numbers on Wednesday. AK Steel (NYSE:AKS) actually topped estimates, and almost doubled its total shipments compared to Q2 from 2009. The company also reversed its second quarter loss of 43 cents per share a year ago to a 24 cent profit this year. U.S. Steel (NYSE:X) was singing the same song. Even though the company fell short of earnings outlooks of 63 cents per share, the 45 cents per-share profit was still better than the $3.28 loss from a year earlier.

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All good news, right? Not so fast. These steelmakers may be back in the black, but if their expectation about future demand is on target, the recent past may be prettier than the near future.

Tepidness Forecasted
Last quarter may have proven to be solid for steel stocks, but the total-quarter numbers don't really explain what happened in the midst of the quarter.

Beginning in May, steel prices dropped and demand started to wither. The two go hand-in-hand, of course, and jointly confirm that steelmakers have something to worry about. And it wasn't just a perceptual thing. Flat, long and scrap metal prices all did peak in April, and are still falling.

Slacking demand from the automobile and construction industries - two of the biggest steel customers - were cited as the reason for the expected tepidness in the third quarter. Companies outside the industry confirmed the impending trouble.

Take Ford (NYSE:F) for example. It just posted impressive quarterly numbers, but it's worth noting the company cut its 2010 sales outlook for the whole industry by half a million autos (about 4% less than the prior expectation).

And if you thought the residential construction industry was struggling, you should take a look at the non-residential construction market in the U.S. The American Institute of Architects (AIA) forecasts that domestic non-residential construction of hotels, office buildings and the like - which relies very heavily on steel materials - will be down a hefty 20% in 2010.


More to the Capacity Story
The loudest alarm bell was rung by ArcelorMittal on Wednesday. After falling short of revenue expectations for last quarter, the company went on to announce the second half of the year would force the company to mothball some of its capacity again, as China's growth spurt starts to slow. AK Steel is also cutting capacity, even though (as the company put it) orders in the second quarter were just "down a little bit".

While on the surface it makes sense to scale output with demand, given the cost and trouble of even just temporarily dialing back on capacity, these companies may actually see something more difficult on the horizon than they're suggesting.

Bottom Line
Point being, steelmakers' worries aren't arbitrary, or sandbagging - the rest of the year should be quite tough. While there's the risk of an over-reaction from the market being built in here - tapering growth rates are not the same as shrinking demand - there's also just the straight-forward risk of disappointed investors in the foreseeable future. (Learn about an indicator that gauges global supply and demand of raw materials in The Baltic Dry Index: Evaluating An Economic Recovery.)

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