Steel is used because it is a magnetic material. The object is to complete the magnetic circuit on the side of the magnets that isn't facing the coils. Transformers use it for the same reason, to make a complete magnetic circuit for the magnetic flux to flow out one side of the coils, around an back through. Most of the generator designs I've seen use an air core in the coils which doesn't complete the magnetic circuit through the coil which results in a loss in potential performance. This performance loss is accepted since it greatly simplifies construction and does have an effect on reducing cogging (starting the blades spinning is easier). Some people have experimented with using sand containing iron (a magnetic material) to core the windings but I haven't heard how successful that has been.
