Lower oil prices have squeezed the profits of mainland firms that turn the nation's abundant coal into liquid fuel and chemicals that compete with crude oil-based products, but analysts say the long-term potential of the nascent industry remains on track. The prospects of these firms have been helped by the fact that a drop in coal prices over recent years is of a similar magnitude to that seen for oil over the past seven months. Beijing's long-term strategy to enhance the mainland's energy security by tapping into its domestic reserves along with those of neighbouring nations - in an effort replace crude oil-derived products - also counts in their favour. "In the next three to five years, it is unlikely China can grow domestic oil output by much, so it will rely on imports to meet growing oil demand," CLSA's Asia oil and gas analyst Simon Powell told the South China Morning Post . "Anything economically viable it can do to cut oil and gas import is seen as desirable." The mainland's oil import reliance is projected by state-owned China National Petroleum Corp, parent of listed PetroChina, to exceed 60 per cent for the first time this year, up from 37 per cent just over a decade ago. Powell said that while profit margins at coal-to-liquid fuel and chemicals projects have been eroded substantially by crude's sharp slide, they are still "reasonably attractive" in the long term, particularly given the recent pick-up in oil prices. Prices at the nation's largest coal port Qinhuangdao have fallen some 44 per cent since mid-2011, while the Brent crude oil benchmark in recent days is lower than last June's high by 46 per cent, after rebounding by a third from the low seen a month ago. According to a Credit Suisse report, a typical mainland coal-to-chemical project would roughly break even when the oil price slightly exceeds US$60 a barrel, at which the prices of the mainstay products - typically base chemicals ethylene and propylene - would fetch around US$1,000 a tonne, while coal would costs 200 yuan (HK$251) a tonne. The Brent oil benchmark traded at around US$62 a barrel last Tuesday, up from a low of US$46.60 in the middle of last month. Credit Suisse's analysts estimated that if crude oil averages US$50 a barrel this year, roughly half that seen last year, China Shenhua Energy would see its net profit pared by 7 per cent this year from last year. They also said China Coal Energy would add 2.2 billion yuan of losses from its three coal-to-chemicals projects, two of which entered production last year, based on that oil price assumption and that the plants will take years to fully ramp up. China Shenhua, which mines and transports coal and generates power, is estimated to incur a 2.6 per cent drop in net profit to 38.1 billion yuan this year, while coal miner and chemicals maker China Coal is tipped to see net profit rebound 19 per cent to 1.9 billion yuan after a plunge of 75 to 85 per cent last year. China Shenhua operates a coal-to-liquid fuel and chemicals project in Inner Mongolia, while China Coal operates three chemical projects in Shanxi province and Inner Mongolia, and is building one in Shaanxi province. A China Coal spokesman said some of the company's coal-chemical plants are in "difficult" conditions but that their collective contribution would likely generate a profit, citing the start-up of production at two of the projects. "Their profitability will depend on the level of utilisation and operating costs and, while the oil price is low now, it is not expected to stay this low in the long term," he told the Post . An energy sector analyst at a European brokerage said technology advancements at new coal-chemical projects meant they use roughly 10 per cent less coal to make a tonne of chemicals compared with older plants. "That means they can absorb the shock of lower oil prices better," she said. "Also, if your project is located in Xinjiang, your coal price could be as low as 100 yuan a tonne, which makes it even more competitive." But oversupply in some low-end base chemicals is a concern, she added. The order pipeline of Hong Kong-listed Sinopec Engineering, which builds chemical plants for project owners, suggests developers have not been deterred by the plunge in oil prices. The firm obtained 14.9 billion yuan of construction contracts for coal-to-chemical plants in the second half of last year, when oil prices fell sharply, compared with 8.1 billion yuan in the first half. Sinopec Engineering in November obtained 7 billion yuan of orders for building a coal-to-chemicals plant in Anhui province in a venture with sister firm China Petroleum & Chemical (Sinopec). "Given the backdrop of the mainland's coal-rich but oil and gas-short condition, diversification of raw materials to produce chemicals, fuel and natural gas is a trend, and we are applying new technology to expand the coal-based chemical industry chain," a Sinopec Engineering spokesman told the Post . Sinopec received preliminary approval from Beijing in 2013 to build a 180 billion yuan project to turn coal in Xinjiang into natural gas to be piped to the southeast. The construction green light may be given this year after detailed feasibility studies are completed, and the estimated engineering, procurement and construction budget that Sinopec Engineering may tap amounts to 30 billion yuan, Powell said. If the project goes well, it could bode well for Sinopec to realise a project to turn coal in Mongolia into natural gas to be piped to the mainland. Sinopec in late 2013 inked a memorandum of understanding with Mongolia's government on the proposal.