UPDATE 1-China Wuhan Steel says unable to afford term ore

(Releads with spot market purchasing, adds quotes, detail)

By Alfred Cang and Coco Li

BEIJING, March 6 (Reuters) - Wuhan Iron and Steel Group, China's third largest steel mill, has bought iron ore only on spot markets since January as it cannot afford 2008 term prices because steel oversupply is hurting profits, its president said.

"We buy iron ore from whoever offers the lowest price," Deng Qilin told reporters on Friday.

He declined to say whether the company, which normally imports more than 18 million tonnes a year through term contracts, had bought the spot iron ore from term suppliers.

"We are capping the prices we pay for iron ore now," Deng said after a parliament meeting during the key annual session held in Beijing.

Deng is also the newly-selected chairman of the China Iron and Steel Association, which is cooperating with Baosteel (600019.SS), the country's biggest steelmaker, in annual iron ore price talks with top ore suppliers BHP Billiton (BHP.AX) (BLT.L), Rio Tinto (RIO.AX) (RIO.L) and Brazil's Vale (VALE5.SA)(RIO.N).

"We are still in talks with the miners after two rounds of negotiation," Deng said.

"But the miners must lower the price, otherwise, who can afford it?" Deng said, citing weakened domestic steel prices due to China's worrying oversupply. "We produced 500 million tonnes last year and the capacity is about 600 million tonnes."

At present the term year runs from April. Deng said the Chinese side was still bargaining to reset the start of the year to January.

OVERSUPPLY CONCERNS

China's crude steel output was 1.42 million tonnes a day in February, equivalent to about 520 million tonnes a year, as some steel mills speculated on a price rebound and blindly resumed production, Deng said.

According to a Reuters calculation, that means February output totalled 39.76 million tonnes, a 5.2 percent increase on the 37.79 million tonnes produced in December 2008, a longer month and the last month for which data is available.

But large-sized Chinese steel mills such as Baosteel, Angang and Wuhan had not expanded their production, Deng said, noting that his company had cut output by 15-20 percent, although it aims for sales of 120 billion yuan ($17.6 billion) and a profit this year.

"We can meet our target as we are a big company. Big steelmakers in China saw marginal profits or broke even in January but most small mills were still in losses," he said.

Deng said oversupply concerns had caused the central government to delay giving a green light to its flagship project in the port city of Fangchenggang in the Guangxi region and a similar scheme belonging to Baosteel in Zhanjiang, Guangdong province.

Both projects have an initial capacity of 10 million tonnes a year and have already got clearance to build the necessary infrastructure.

Both are in coastal areas, however, and analysts have said China may be slowing down a push to relocate steel towards coastal areas because of the weak market.

"The National Development and Reform Commission said they would approve further works in a proper time ... as the situation is not optimistic," Deng said. ($1=6.839 Yuan) (Editing by Anthony Barker)