Stock market lessons from PGMs during Covid-19

Stocks can add diversity and earning potential to your investment portfolio, but remember that no one can predict exactly how the price of a stock will behave – especially over the short term. You need a fair degree of experience in the market before you can master short-term trading in individual stocks successfully – which is why so many private investors prefer to invest in the stock market through unit trusts managed by a financial services provider.

Unit trusts deliver more reliable returns because they are designed to encourage long-term commitment to stock-market investment. If you trade in the stock market as an individual investor, a long-term strategy likewise delivers more predictable returns – but you may also be more likely to panic during short-term market dips and cash out investments before it’s wise to do so.

Consider a topical example: the shifts in the platinum price since 2020 illustrate the pitfalls of being a panicky investor and why it’s wiser to hang on to certain stocks during uncertain times. It’s also a useful demonstration of how the laws of supply and demand affect market prices.

The story of the platinum group metals versus Covid-19

The platinum group metals (PGMs) are among the rarest elements on earth: namely, platinum, palladium, rhodium, ruthenium, iridium, and osmium. South Africa is the single largest source of PGMs in the world, thanks to our (relatively) vast deposits of platinum, palladium and rhodium mined mainly in North-West, Limpopo and Mpumalanga. Major local PGMs producers include Anglo-American Platinum, Impala Platinum and Sibanye-Stillwater.

The highest demand for these metals is from the automotive industry. Catalytic converters for petrol engines consume 90% of the palladium and rhodium on the market, and exhaust after-treatment in diesel vehicles uses 36% of the platinum produced. Jewellery is another major consumer of platinum, but because the PGMs market as a whole is so reliant on the car industry, demand is dominated by China – the country that produces more than a quarter of the world’s cars and trucks.

It’s safer to treat stock market investing as a long-term strategy, backed by expert advice

The Chinese automotive industry shut down along with the rest of the country in early 2020, in the first of what would become worldwide Covid-19 lockdowns. As retail shopping also closed around the world, the sudden fall in demand for PGMs in both the car and jewellery industries meant that South Africa risked mining an oversupply – so the price of platinum dropped. As South Africa went into lockdown, local car and jewellery manufacturing also ceased production, leading to a further fall in demand for PGMs. On 20 January 2020, platinum was selling at $1,034 an ounce; by 19 March that year, it had dropped to $621. The January price had fallen by more than a third in 2 months.

An impulsive investor would have panicked and dumped PGMs stocks at this point. But the South African lockdown in March 2020 also meant that our platinum mines had closed – so falling PGMs supply began to match falling demand. When lockdown conditions eased, the automotive and jewellery industries returned to production, creating rising demand, which the mines reopened to supply.

By 16 February 2021, platinum was up to $1,325 – 28% higher than the January 2020 peak. Since then, the price has fluctuated, although it’s never fallen below $925, and it was at $1,094.50 on 23 February 2022. If you stayed put on PGMs investments in March 2020, you’d be rejoicing today. PGMs prices are maintaining a general upward trajectory as the automotive and jewellery sectors go back into full production.

A hopeful future for PGMs

As the world moves towards greener technologies, the future looks bright for PGMs. They’re a key component of catalytic converters reducing emissions from internal combustion engines, although we may see the phasing out of those engines as electric vehicles become standard. Nevertheless, several developing technologies should see demand for PGMs continue to grow for many years – these metals are already essential to hydrogen fuel cells, lithium batteries, low-loss computing and food technology.

The market ups and downs that the platinum price has seen during the Covid-19 pandemic are to be expected, but they’re also an important reminder that it’s safer to treat stock market investing as a long-term strategy, backed by expert advice. ‘Playing the markets’ on your own is effectively gambling and may lead to severe losses.

Nedbank has many market-related investment products to consider if you’re looking for safer long-term stock market returns.