Oţelu Roşu is located at an altitude of approximately 300 meters in Valea Bistrei valley, which is between the Poiana Ruscai mountains to the north and the Ţarcu Mountains to the south. To the south of Oţelu Roşu is a large piedmont of the Ţarcu Mountains, locally named Gai. To the north the town makes direct contact with the foothills of the Poiana Ruscai Mountains. Dominant height are the hill of Ferdinand (overlooking the metalworking uzine) and the hill of Chiciura.
Oţelu Roşu is subjected to western climatical influences because of its altitude and location. The altitude and the neighbouring forests and mountains assure a mild climate. In the winter, snow may persist as much as two or three months, however the temperatures do not drop too low. In the spring months, especially May, floods are possible due to the melting of the snow in the high areas of the Ţarcu Mountains and abundant rains. The most recent flood took place in the year 2000, destroying several bridges across the river Bistra.
The first signs of human habitation date from the Paleolithic, in form of primitive tools. Sporadic remnants from the Neolithic age have been found in the neighbouring areas.
During the wars between Romans and Dacians, the Bistra Valley was the route used by the emperor Traian in penetrating into the heartland of Dacia. A Roman castrum found near the cemetery of Zavoi (ancient Agnaviae), a locality close to Oţelu Roşu, dates from this time.
In the fifteenth century, during medieval times, Oţelu Roşu appears under the name of "Bistra", and later with the Hungarian name of Nandorhegy. After the expulsion of Turks from Banat by the Habsburgs, the area was colonised by Germans. Also, Italians are brought in to work in metalworking industry. Later, as Transylvania became part of Romania the name of Nandorhegy is being replaced with the name Ferdinand.
After 1947 the Ferdinand name did not please the communists anymore and they changed it to Oţelu Roşu ("[The] Red Steel") in order to underline the importance of the town's metalworking industry.