Powdered aluminum serves the reducing agent for this reaction. Aluminum powder is known as a powerful reducing agent. Iron(iii) ions would have greater electron affinity as compared to a metallic aluminum thus it would easily gain electrons from aluminum making it less positive in this case formed into a neutral atom. The chemical reaction is
Fe2O3 + 2Al = Al2O3 + 2Fe.
Oxygen in the oxide compound does not participate in this redox reaction, as it is not changed chemically. Fe2O3 is an ionic compound which has of Fe[3+] ions and O[2-] ions. So, the net ionic reaction would be
Fe3+ + Al + 3O2- = Al3+ + Fe + 3O2-
The ionization energy of aluminum is greater than that of iron, so the said reaction would generate large amount of heat which is needed in welding.