This skill determines what your character can make with the smithing skill. A higher level makes it possible to follow the more complex plans. A higher level in smithing also increases the yield for pressing ingots out of minerals. This attribute may not be affected by equipment.
As you can see on the screen, every item has a smithing level required to craft. In order to make a specific item you'll need to have a smithing level at or above the number shown. This is also true for alchemy, tinkering and wandcrafting, respectively. Certain plans are scattered in bookshelves around the dungeon, and some levels of certain skill trees will teach crafting recipes.