Hi Forest
You probably know that steel contains Iron i.e. a ferromagnetic material. In a ferromagnetic material, some spins (especially 3d) are well aligned in certain directions. But in a big sample (like a steel knife for example) the total energy would be too big if all spins are aligned in the same direction. So, inside the sample will nucleate some regions with spins aligned on different/oposite direction (ferromagnetic domains) in order to minimize the total energy of the sample. So the "magnetism" is already inside the sample but it is self-compensated (as you have many small magnets with random orientations). Under an external influence (magnetic field, mechanical tensions, etc.) the size of some ferrmagnetic domains can change and accordingly the sample get a non-zero magnetic moment.
By grinding and sharpening it is possible to induce some modification in the ferromagnetic structure of the knife and it becomes "magnetic".