Despite a slumping domestic economy, U.S. Steel (X) posted its biggest quarterly profit in the 107-year history of the company Tuesday.

The heavy industry titan reported a profit of $5.65 a share, more than doubling its profit of $2.54 a share from a year ago.

The company also increased its quarterly dividend to 30 cents a share.

Shares of the iconic steelmaker were up 15% in late-afternoon trading.

“We thought it would be good, but not THIS good,” wrote Credit Suisse steel industry analyst David Gagliano, in a research note. 

U.S. Steel, the largest U.S.-based steelmaker, has seen its fortune expand primarily due to rising global demand for raw materials and a weak U.S. dollar.

As recently as 2004, U.S. Steel and other steelmakers such as NuCor (NUE) saw their business suffer because of a flood of cheap Eastern European and Asian steel onto the domestic market.

Now those countries have growing economies of their own and they need steel to fuel that growth.

“Supply is simply not catching up with demand,” said Min Ye, an analyst with Morningstar in Chicago.

The demand for steel is at near-historic highs in the U.S., as well.

U.S. Steel said its domestic manufacturing ran at an average 92.7% of their possible capacity for the quarter. In comparison, the nation’s oil refineries, which are often used as an example of a stretched industry, ran at 88% capacity in May, according to the Department of Energy.

 “The U.S. is more dependent on its own steel production than any time in its history,” said Eric Marshall, portfolio manager for Hodges Fund, who owns shares of U.S. Steel and the other steel makers.

One of the biggest drivers of the steel industry has been the massive demand for steel on a world-wide scale. China, as it gears up for the Olympics, has been consuming steel at a record pace year-over-year.

According to John Anton, a steel industry analyst with Global Insight, China’s production of steel went from 100 million metric tons at the beginning of the decade to 500 million metric tons in 2007.

“While China is bringing on new capacity, they are consuming steel faster than they can make it,” Anton said.

While U.S. Steel did post a record quarter this time around, few analysts believe that pace will continue through 2009.

Analysts like Ye and Anton said they are concerned that increasing prices for iron ore – a necessary ingredient in steelmaking – and the possible softening demand internationally, may eventually squeeze the margins of companies like U.S. Steel.

A common metric of iron prices, a product known as iron ore fines, is up from $76.20 per metric ton in 2006 to $132.20 per metric ton, according to The Wall Street Journal. So far, steel prices have risen at a faster pace than iron prices because of demand, but that pace is expected to slow down.

“Steelmakers are cyclical industries,” Anton said. “We’re at the near the top of that cycle. Will it continue to be profitable – yes. But I don’t think as much as it was this quarter.”