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 percent after gaining from June to August. Analysts expect the downward pressure from increased supply to persist for the rest of the year.
"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," said an iron ore trader in Shanghai.
"While the Chinese economy is getting better, which means demand will continue ... if there's too much supply, you could see prices correcting to $120-$125 in October."
Ore with 62 percent iron content .IO62-CNI=SI, the industry benchmark, rose half a percent to $132.40 a tonne on Monday, based on the latest available data from compiler Steel Index. The price is not far above the six-week low of $131.10 reached on Sept. 17.
A similar price gauge by Platts was unchanged at $131.50 on Monday, traders said. 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 $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-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.
"Strong Chinese steel production and iron ore imports in recent months have masked weaker fundamentals," Citi said.
"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 fourth quarter."
Chinese steel demand typically picks up pace in September and October along with construction activity, but high product stockpiles suggest otherwise.
Inventories of rebar, a steel product used in construction, rose to 6.0809 million tonnes last week from 5.9704 million tonnes the previous week, based on data compiled by Chinese consultancy Mysteel.
The most actively traded rebar contract for January delivery on the Shanghai Futures Exchange was up 0.2 percent at 3,643 yuan ($600) a tonne by the midday break, having hit a 2-1/2-month low of 3,612 yuan on Monday.