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In the wiki, they say that tools can be made from steel, but in the game, it doesn't work. Later on, you can upgrade your toolsmiths to something better than work with steel tho.
Should still be fixed, though.
Note that in the current Beta (a couple days old) we have been given the ability to fix the number of workers so the game now lets us pick how to use infeed material a little better.
And you should absolutely be able to use older versions of your improvements, at least one step back - I strongly second that. I understand that newer improvements may need, for example, steel to work properly, but that doesn't mean that you immediately forget about older techniques - you should still be able to work iron or copper bars.
When you choose to build something you should see right on the icon the availability of inputs in the region.