The Fe-based composite coatings with RE oxides were prepared on low-carbon steel substrate by use of the plasma jet surface metallurgy, and the effect of RE on microstructure of coating was investigated. The result shows that the microstructure and properties with a proper amount of RE oxides are better than these of the coatings without RE oxides. In addition, the modifying effect of RE oxide on inclusions in metallurgical coating was studied by means of thermodynamics. The thermodynamics analysis shows that RE oxide (Ce2O3) can be reduced to RE by carbon, then the RE element can react with oxygen and sulfur to form the RE oxide-sulfide in metallurgical pool. As a result, the coating is purified and the solidification crack of coating can be restrained by deoxidization and desulphurization.