The production of iron using hydrogen as a reducing agent is an alternative to conventional iron- and steel-making processes, with an associated decrease in CO2 emissions. Hydrogen plasma smelting reduction (HPSR) of iron ore is the process of using hydrogen in a plasma state to reduce iron oxides. A hydrogen plasma arc is generated between a hollow graphite electrode and liquid iron oxide. In the present study, the thermodynamics of hydrogen thermal plasma and the reduction of iron oxide using hydrogen at plasma temperatures were studied. Thermodynamics calculations show that hydrogen at high temperatures is atomized, ionized, or excited. The Gibbs free energy changes of iron oxide reductions indicate that activated hydrogen particles are stronger reducing agents than molecular hydrogen. Temperature is the main influencing parameter on the atomization and ionization degree of hydrogen particles. Therefore, to increase the hydrogen ionization degree and, consequently, increase of the reduction rate of iron ore particles, the reduction reactions should take place in the plasma arc zone due to the high temperature of the plasma arc in HPSR. Moreover, the solubility of hydrogen in slag and molten metal are studied and the sequence of hematite reduction reactions is presented.