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Question:

Does steel have water in it?

Is condensation on steel caused from water being pulled out or is the condensation formed from the air around the steel object?

Answer:

When moist air comes in contact with the cooler steel, the water vapor changes to a liquid or condenses. Steel is made of iron and carbon, not water.
steel is made from very high temperature iron. water would vapourize at such high temperature. adding a little bit carbon, mix it well with iron, quench (dip it into water); water around the ingot would sizzle. water inside the ingot would vapourize. then the iron turns into steel called martensite. condensation means water are materializing from the air on cold surfaces. there is no water molecules inside steel.
Steel contains no water; any water that you see is condensed out of the air.
Condensation forms when temperatures vary 'quickly'. The air itself is what provides the moisture. There you go.

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