The Steel Weaponsmith takes the Steel, adds a few nuggets of Coal and produces a Steel Sword.
Steel Swords are very handy and production of 2,000 of them to make a fighting force of 200 Soldiers is perfect for the vast majority of early Adventures and battles. If you are careful you can keep these 200 for a very long time and lose only the few necessary to complete some islands faster.
As with other production buildings its output can be temporarily doubled with a Buff and can be permanently upgraded with resources.