This is a way to adjust the carbon content of iron higher. If tamahagane comes to the smith with too low a carbon content he will do this to increase it. Many smiths will look for old temples that have burned and collect the old iron. Old iron or wrought iron is a totally different material than modern iron and steels.They say that the currently produced Tamahagane in the Hitachi Tatara is not the same product produced hundreds of years ago.
The basic premise is to build a tall charcoal fire in the forge, get it hot, then pile the old iron on top and cover with charcoal. The iron semi liquifies and picks up carbon on its path downward. How much or how little is the $50,000 question and part of the art of it.