Steel can be crafted from iron and coal at an alchemy table. You can find alchemy tables at most blacksmith, for example in Aldlyn.
After finding the necessary clue upstairs you need to some characters about it downstairs. The reply can affect what someone else says or what you ask, therefore just talking to everyone once without paying attention doesn't work. :) After having all necessary dialogs the option to solve the case by talking to the soldier near the corpse becomes available.
Should you have trouble to find the solution, you can find it in the FAQ section of the walkthrough. ;)