Couple things: Terrestrial Martial Arts ARE magic, and there is nothing the Fae can do short of killing everyone who enlightens their essence to stop people from learning them. Essence is the law of exalted, charms will always function to "overwrite" reality in the immediate vicinity, and all essence users can master the universal charms which make up terrestrial martial arts. Preventing iron from forming, and preventing there from being any gods, both these are child's play compared to the sort of cosmological hoops you'd have to jump through to rewrite reality to the point that magic simply doesn't work. Sorcery is similarly written into the fabric of the Shinma through the use of Miracle Shells: any being that is "of creation" and can channel essence can learn it.

Also, exaltation (as mentioned when you brought this up earlier) is independent of the gods. Lytek gets no say in who exalts, his knowledge or consent isn't required. All it takes is a human soul, an act of heroism, and a free exaltation. The only force known to the setting capable of blocking a celestial exaltation is the Seal of Eight Divinities, constructed by the inventor of exaltation specifically to keep Exalts out. Anywhere else, an exaltation can find its hero: whether in creation, the wyld (including all the way in pure chaos should a mortal somehow survive to reach it), malfeas, the underworld, yu-shan.

You can get around both these by saying that the people there aren't actually Human. It makes sense: The Fae tend to hate creation with the pretense of a fiery passion, so it seems unlikely that they'd create a pocket world. And humans are tasty, but apart from that they're of creation. But an unshaped rewriting a portion of the world to look like creation, not metaphysically fixed in place in the same abhorrent way, with soulless actors who look human... That could work. Since they wouldn't have souls, they wouldn't exalt and they could be fixed such that they can't work essence and can't use magic (because, essentially, they'd be animate objects).

But in general, this is a pretty bad idea. What makes exalted Exalted is the way that the magic and the divine pervade the world. By stripping out the magic, you're fundamentally changing the character of the setting. At that point, it's better to use a different system, because while I don't think Exalted is as bad as memetics would have it, it's certainly not the best system and absolutely not good for low fantasy (there are far better systems I can recommend for that).