I never really understood this distinction between "iron" and "steel" anyways. The terms are interchangable. What does the game mean by Iron and Steel? Impure cast-iron and 20th century stainless steel alloy 1040 or what?
Iron is an element. Steel is an iron alloy with carbon (sometimes other metals) added to it, IIRC, to counteract the brittle nature of straight iron. The carbon is why charcoal/coke is an ingredient in the process, and not just fuel for the fire.
Well duh. So the simple iron objects in the game are made from pure iron, using an advanced smelting tecnique unknown to modern science and steel is so advanced that it introduces carbon into the otherwise pure elemental mixture? I don't think so.
So what does a sword made of pure iron look like in the real world, anyways?
Seriously. Do you know anything about science at all? Steel is what made the modern world possible, and you're assuming it's just interchangeable with iron?
The iron objects in the game are wrought iron. Not 'pure' iron. You don't GET pure iron outside of a foundry. It reacts too well with carbon.
Wrought iron is a low-carbon iron with a bunch of impurities. Easily worked, and is pretty much iron extracted from the rock and worked.
Pig iron is accurately portrayed as an intermediate yet totally useless form of high-carbon iron. Lots of carbon, fewer impurities, but way too brittle to be of use.
Steel is iron with a higher carbon content, and other impurities removed. The carbon settles into crystals, the structure of which can be altered through heating and cooling in various ways. The actual carbon content is important; high carbon content leads to a harder, more brittle steel, while lower carbon content is softer, more flexible and ductile, and will bend rather than just break. As such, harder steels hold and take to sharpening better, but the edge is easily damaged.
The difference is that steel is a lot harder than iron. It's also less prone to rusting. It's stronger, can be worked easily, and the carbon content gives it almost infinite adjustability, and lets you put multiple properties on the same piece of metal. Katanas are a fine example of this; the steel has the same carbon content all the way through, but the back of the blade is softer and less brittle than the sharpened edge, due to cooling at a different rate.
Most importantly, steel can take tension. It can be stressed. The best you can do with iron is add a load of carbon and come out with brittle cast iron, that can be cast into shape and deal with compression, much like stone.
This is the reason why iron bridges are short arches, while modern bridges are tensioned structures with huge spans.