Spot iron ore prices edged higher as some Chinese mills replenished stocks but interest from the biggest importer of the commodity was slow reflecting a subdued steel market.

Supply of iron ore has outpaced demand this month, dragging down spot prices by almost 4% after gaining from June to August. Analysts expect the downward pressure from increased supply to persist for the rest of the year.

An iron ore trader in Shanghai said that "I don't think there's too much buying interest on the ground. Even iron ore cargoes at the ports are not selling that fast. While the Chinese economy is getting better, which means demand will continue if there's too much supply, you could see prices correcting to USD 120 to USD 125 in October."

Ore with 62% iron content, the industry benchmark, rose half a percent to USD 132.40 per tonne based on the latest available data from compiler Steel Index. The price is not far above the six week low of USD 131.10 reached on September 17th 2013.

Traders said that a similar price gauge by Platts was unchanged at USD 131.50. Activity in the physical market was also limited with most traders attending an industry conference in Qingdao, China, that kicks off on Wednesday.

Citi said in a note it sees iron ore slipping to USD 115 in the fourth quarter due to weaker than expected Chinese steel demand and more iron ore supply coming through.

Combined output from Australia's top three miners Rio Tinto, BHP Billiton and Fortescue Metals Group is forecast to increase by a record 34 million tonnes in the fourth quarter from a year earlier and by 12 million tonnes from July to September, according to the investment bank.

Rio Tinto, the world's No. 2 iron ore producer, loaded the first shipment of iron ore from its expanded annual capacity in Australia of 290 million tonnes earlier this month. It is looking to lift output to 265 million tonnes this year from around 200 million tonnes in 2012.

Citi said that strong Chinese steel production and iron ore imports in recent months have masked weaker fundamentals. Excess steel production has been pushed onto international markets, while iron ore inventories have been rebuilt at lower prices. Pricing and supply dynamics have shifted in recent weeks and we expect weaker steel production and softer demand for imported ore in the Q4.