Pieces of steel in cylinder??

You're seeing it right.... maybe a too-small seat got put in. There are a ton of different seats sizes out there and wo knows what migth have been used because it was on-hand.

As said, the OP needs to pull out #5 exhaust now and see if the seat is gone. That is the one that is badly sunk.

Yes, you can see the gap around the #5 sunken exhaust valve where the hardened seat is missing. It will stick out like a sore thumb when he pulls that valve out.