The effects of steel slag (SS) addition on the strength and water resistance of magnesium phosphate cement (MPC) are investigated, and the hydration mechanism is proposed in this paper. With the addition of SS, the strength and water resistance of MPC were significantly enhanced. The compressive strength of MPC with 10 wt% SS (SS 10) cured in air for 60 d reached 56.7 ± 4.2 MPa. Interestingly, the strength loss rate of the sample cured in water for 14 d was only 6.6%. In addition, the microstructure and hydration products of MPC specimens were investigated via X-ray diffraction and scanning electron microscopy. There was a significant amount of unreacted MgO after MPC curing, and the main hydration product was struvite-K. The amount of struvite-K (KMgPO4·6H2O) of MPC with 0 wt% SS decreased after curing in water. However, no significant changes in the amount of hydration products was evident for SS 10, and the compactness was enhanced. This work provides a new approach for the resource utilization of SS.