Powdered aluminum is used in the thermite reaction for welding metals. what role does the powdered aluminum play in this reaction?

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.