Dung Quat 2 lifts output to a new level

The operation of Hoa Phat's (HoSE: HPG) Dung Quat 2 project at high capacity has continued to boost Hoa Phat Group's steel output.

According to the company, its Hoa Phat Dung Quat steel complex in Quang Ngai province produced 1 million tons of molten iron in August 2026 for the first time in a single month, up about 2% from July. The figure was also nearly 65% higher than a year earlier and marked one year since all six blast furnaces at the complex began operating in sync.

Molten iron is not a finished product sold to the market, but is an important input in the steelmaking chain. Iron ore, coking coal and other raw materials are fed into blast furnaces to produce molten iron, which is then further processed into steel and rolled into HRC, construction steel or other products. The company also said blast furnace operating efficiency is one of the key factors determining costs and efficiency across the production chain.

The August output continued a capacity ramp-up that began in Q2. Hoa Phat sold 1.9 million tons of HRC in Q2, up 31% from Q1 and 64% from a year earlier.

For Q3, brokerage MBS forecasts Hoa Phat's total output at about 4.1 million tons, including around 2.1 million tons of HRC. Compared with MBS's Q2 figures of 3.65 million tons of total output and 1.92 million tons of HRC, Q3 sales could rise by about 12% and 9%, respectively, from the previous quarter.

But higher volumes may not necessarily translate into a corresponding increase in revenue and profit.

Under the same forecast, Hoa Phat's Q3 revenue is expected to be around VND55.3 trillion ($2.13 billion), virtually unchanged from nearly VND55.16 trillion in Q2. Net profit, meanwhile, is forecast at around VND5.6 trillion ($215.45 million), about 12% below the over VND6.37 trillion recorded in the previous quarter.

If the forecast materializes, Q3 would therefore present a notable divergence: Hoa Phat could sell about one-tenth more steel than in Q2, while revenue remains broadly flat and profit declines.

The key factor is the profit the company can generate per ton of steel.

HRC prices cool, coking coal costs rise

Pricing conditions in Q2 were relatively favorable for Hoa Phat. According to MBS, average steel prices in Q2 rose about 8% from a year earlier, outpacing an increase of around 6% in coal prices, while iron ore prices were broadly flat. As a result, gross margin reached 19.01%.

The relationship changed in Q3. At the beginning of June, Hoa Phat Dung Quat cut its price for SAE1006/SS400 HRC for July delivery by about $13 per ton from the previous month, to VND15,360 ($0.59) per kg in northern and central Vietnam and VND15,390 per kg in the south, excluding VAT.

MBS also noted that steel prices in Q3 had adjusted by about 6% from Q2. Meanwhile, MBS estimates coal prices rose about 17% year-on-year, while iron ore prices remained relatively stable. The brokerage therefore forecasts Hoa Phat's Q3 gross margin at around 17%, down about 2 percentage points from Q2.

Developments in the coking coal market also point to clear pressure from rising input costs during the quarter. The reference price on Trading Economics stood at $276 per ton on September 8, up 26.8% from a month earlier. By September 21, the price had eased to $263 per ton but was still 12.15% higher than a month earlier and nearly 35% above its year-earlier level.

The reference price reflects the market and is not Hoa Phat's actual purchase price, but it indicates a significant shift in the cost environment during Q3.

Coking coal is used to produce coke, which is then used as fuel and a reducing agent in blast furnaces to produce molten iron. With molten iron production at Dung Quat at record levels, movements in coking coal prices have a significant impact on the cost of the blast-furnace steelmaking chain.

However, market coal prices do not immediately flow through into financial statements. Hoa Phat also holds inventories of raw materials, while transportation and processing take time before coal is used in blast furnaces.

As of June 30, the company's financial statements showed inventories of raw materials worth about VND25.3 trillion ($973.37 million), along with about VND10.7 trillion of goods in transit.

As a result, the sharp rise in coal prices in late August and early September may only have a partial impact on Q3 costs and could continue to affect the following quarter.

The difference between the two quarters is therefore more significant when viewed side by side. In Q2, lower output was offset by selling prices and raw material costs that allowed gross margin to reach about 19%.

In Q3, output could rise by more than 12%, but HRC prices have fallen from the previous quarter's high levels while coking coal has become more expensive, pushing the forecast gross margin down to around 17%.

This is why profit could fall about 12% from Q2 even as steel output continues to increase.

Still, the raw-material outlook has introduced a new variable. Coking coal prices have fallen from above $280 per ton in early September to $264 per ton on September 24. MBS continues to use an average coal price assumption of $280 per ton for 2026, while assuming an iron ore price of around $101 per ton.

If coal prices continue to fall in Q4 while steel prices do not decline by a similar amount, the gap between selling prices and input costs could become more favorable. However, given the lag caused by inventory levels and raw-material procurement cycles, there is not yet enough evidence to regard Q3 as the bottom for Hoa Phat's margins.

In the longer term, production growth at the company is not limited to Dung Quat 2. Hoa Phat is accelerating construction of a rail and special steel plant at Dung Quat, with investment of more than VND10 trillion ($384.73 million) and first output expected in Q1 of 2027.

After Dung Quat 2 lifted production capacity to a new level, Hoa Phat's profit outlook will therefore depend not only on the volume of steel sold, but also on the cost of inputs such as iron ore and coking coal.

On the Ho Chi Minh Stock Exchange (HoSE), HPG shares closed Thursday at VND20,800 ($0.8).