You can add effects on your armors/weapons with the different ingredients you found. Like the essences will add resistance bonus on you armors. Thus, you can upgrade your items.

At level 5 (crafting/blacksmith), you'll be able to create "magical" items out right. For example, the leather armor you can create will have more properties, and will still allow upgrades.

Blacksmith skill is linked to metal working and the crafting to everything else.