Ignace Proot, the Senior Analyst Covering U.S. Metals & Mining for Sanford C. Bernstein & Co., LLC: Fundamental Demand Growth Expected in Zinc While Steel Faces Overcapacity

Companies include: Cliffs Natural Resources Inc. (CLF), Teck Resources Limited (TCK), Freeport-McMoRan Copper & Gold (FCX), Arcelor Mittal (MT), Nucor Corporation (NUE), United States Steel Corp. (X), Horsehead Holding Corp. (ZINC), Steel Dynamics Inc. (STLD), POSCO (PKX) and many others.

In the following excerpt from the Metals & Mining Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Please begin with a brief introduction to your coverage, including some of the names that you follow.

Mr. Proot: I cover the sector U.S. metals and mining, which is really two different subsectors: the mining sector and the steel sector. I think it's essential to cover the steel sector, because the steel industry is purchasing almost half of the value of metals globally. So it's an important client, if you will, of the mining sector.

I have three miners. I have Cliffs (CLF), I have Teck (TCK) and then I have Freeport-McMoRan (FCX), who is obviously the largest in market cap. And then I have three steelmakers: ArcelorMittal (MT), Nucor (NUE) and U.S. Steel (X). The advantage of the coverage that I have is that each of these companies provides a fairly unique exposure to one single commodity.

So for Cliffs, it is iron ore; for Freeport, it's obviously copper; and then for Teck, it's actually metallurgical coal. Teck is also mining zinc and copper, but the stock is really trading based on metallurgical coal. I think for the steel makers, the advantage of my coverage, again, for an investor, is really a diversified set here because with Nucor, you have the largest mini-mill steel producer in the U.S., in a nonunionized environment, a very lean culture and a low-cost producer.

On the other hand, you have U.S. Steel, who is fully a blast furnace steel producer in the United States, with 20% of product in Europe - very heavily unionized environment with a high fixed-cost structure, which means much more fixed-cost leverage when the cycle picks up again. And then I have ArcelorMittal, who is the largest global steel maker with 6% to 7% of the globally installed steel capacity, present mostly in Europe, in North America, South America and the CIS region. The key thing I would say here is that besides the fact that it's a steelmaker; it's actually the number-five global iron ore miner. The iron ore segment of ArcelorMittal is actually larger than Cliffs as a whole.

And secondly, ArcelorMittal is the steel maker with the largest market share with automotive steels, which is pretty important for the steel industry going forward. ArcelorMittal is having around 45% market share in Europe with automotive and 40% in North America. I think this is an important element, because the steel industry is gradually evolving toward much more high-value steels. So this is my coverage, my six companies.

I have two top picks...

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