Hydrogen is mainly used during reduction annealing of iron powder produced by spraying of liquid metal by water. Chemical aspects of this process have been simulated using TERRA 6.3 software. In particular, Fe–O–H thermodynamic system has been analyzed a in wide range of hydrogen temperatures and flow rates. It follows from the performed analysis that the main impurity compounds of the sprayed powder are not iron hydrates but Fe2O3 oxide. However, it cannot exist in hydrogen environment and is converted into Fe3O4 oxide at low temperature. Therefore, the main reaction of iron reduction will be the reaction Fe3O4 + 4H2 = 3Fe + 4H2O, which terminates at 910°C. It has been demonstrated that this temperature can be significantly decreased accompanied by the equally significant hydrogen flow rate. Consideration of this factor can be useful for optimization of powder annealing mode.