Although I don't own it, I nevertheless feel like I've spent a lot of 2012 supporting or coming to the defense of steel companies like ArcelorMittal (NYSE:MT), Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD). Maybe there's some logic there, as buying into beaten-down commodity stocks can be a good way to earn short-to-intermediate capital gains, or maybe I'm just stubborn. Whatever the case, it's getting harder and harder to stay optimistic on Steel Dynamics even though (yep, you guessed it) the shares don't look especially pricey today.

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Decent Volume, but Weaker Pricing and Higher Costs
As broadly similar companies, a lot of what Nucor had already said prefigured Steel Dynamics' performance. That tempers, but doesn't erase, some of the disappointment, as does the fact that Steel Dynamics updated (lowered) guidance earlier in the quarter.

Revenue fell 8% from last year and 4% from the first quarter, as external steel revenue fell 5% and rose 2%, respectively. Steel revenue was fueled by a 5% annual and sequential shipment increase, tempered by a 10% and 2% reduction in annual and sequential realized pricing. The company's recycling ops (which actually sells more to external customers than to Steel Dynamics) were worse off; low scrap prices pushed revenue down 19 and 16% annually and sequentially.

Although scrap costs were lower, margins still suffered. Gross margin fell almost four points from last year and almost a full point from the first quarter. All in all, operating profit fell 13% from the first quarter, with the per-ton operating profit down 5%. As the revenue numbers may have suggested, the operating margin was worse in recycling than in steel ops - down 66% versus a 12% sequential drop from 2011.

SEE: Understanding The Income Statement

Lower Costs, but Lower Demand and Lower Prices?
Steel prices really haven't firmed at all this year, as the attempted price hikes of Nucor, Steel Dynamics, U.S. Steel (NYSE:X), AK Steel (NYSE:AKS) and so on have largely gone for naught. In fact, not only have hot-rolled prices recently hit new lows for the year, they're back down to the late 2010 levels.

While low scrap costs will help costs, demand erosion may be a bigger threat. Steel Dynamics management talked about flagging demand strength in markets like agriculture and transportation, and I don't think we're going to see enough growth in autos, non-residential construction and so on to offset it. What's more, I worry that the scrap price declines are demand-driven, as the lower manufacturing activity of recent years should be reducing supply somewhat.

Mesabi Still a Problem Child
Steel Dynamics has long received praise for being one of the best operators in the steel industry, and certainly the company's performance by metrics like labor cost per ton bear that out. Still, the ongoing mess that is Mesabi Nugget may be denting that prestige a bit. Management continues to fiddle with ways to improve operating availability and production this quarter was the lowest it has been in some time.

SEE: Earning Forecasts: A Primer

The Bottom Line
Although current conditions are not great for Steel Dynamics, I don't think the company is in any particular danger. That said, if the gloomier predictions of economists like Roubini prove accurate, next year may be just as bad or worse than 2012.

Taking a 10% discount to Steel Dynamics' usual forward EBITDA multiple suggests a fair value of $17, but investors cannot ignore the risk that the EBITDA estimates continue to erode. While present valuations may lead some to ask how much worse can it get, the fact that the company still trades at over two times tangible book value implies that the answer could be "much worse."

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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