The Steel Smelter takes the Iron (bars), adds a few nuggets of Coal and produces a useable ingot of Steel that can be fashioned by the Steel Weaponsmith into steel Weapons and with Titanium to make even greater swords.
Steel is extrememly important at higher levels and you should aim to produce as much as possible so when it's time to consume it you can make the most of Buffed buildings.
As with other production buildings its output can be temporarily doubled with a Buff and can be permanently upgraded with resources.