Why not call the dust "salamander dust"? It would sound more fantastical and consistent, IMHO.

I cannot find the reaction in the craftshop to extract the wool. The mod appears to be working as the tag is present on the correct types of stone but I cannot extract the strands, am I missing something?

:-)

This is a masterful salamander wool cloth created by Rigòth Rithirid. The thread is black, masterfully colored with bone char by Oddom Tolislòr.

@Obsidiou thanks for the comment. I got inspired to make this mod after watching polish YT video https://www.youtube.com/watch?v=EA_5t0C3RjA and how it was used as artificial snow or in old times was indeed sometimes refer as salamanders wool. I also would like to see if the game mechanics are going to support the physical properties of it well (read - in a way it make a sense)
Thanks for idea about nether-cap parts of cloth I will put that into my todo list.
With safety etc - somewhere in my plans I think about adding the danger part of mining and smelting into the game. It was impossible to do with DF build-in modding system, but with DF Hack and support of Lua scripts maybe I will be able to add that forges do generate smoke and working with melted metals or glass bring risk of spilling it. So DF players would need to take into account some safety measures as well.

This is extremely interesting, and I'd bet it has some weird implications and applications within the game. I can picture dwarves fighting dragons in suits of steel maille sheathed in heavy asbestos dresses, robes, cloaks and hoods a la Terry Pratchett's Grags, or building alien constructions of asbestos and nether-cap to survive in deep magma-vent mountain halls... Only to find that there are more insidious things under the earth than flowing fire, perhaps.

I wonder... will procedural musical instruments built with this stuff appear?

I'm honestly not sure I'd be able to use this substance in the game proper, given the slow horror of its effects, but major kudos to you for making it asbestos in more than name!

Hm... saying that... I wonder... Carefully timed water connected to the pressure plate entering the workshop, with a sufficiently-skilled Strand Extractor... Could be very interesting to work out how safe it can get, with no risk to dwarf health whatsoever!