Citizens are equipped with tools, which help them perform their tasks. As trees are chopped down, crops are harvested etc. these tools wear out and need to be replaced. Citizens without tools will still be able to work, but their productivity is significantly reduced.
Iron tools are crafted by the blacksmith from iron ore and logs. With the addition of coal the blacksmith can produce steel tools, which are more durable therefore don't wear out as fast; steel tools last twice as long as iron, but they do not increase mining speed. Coal can only be obtained through mining, so steel tools are usually reserved for a later part of your city's development.
Steel tools do not sell for significantly more than iron at the trading post.