By Bob Tita

The American steel industry is reaping the benefits of the AI data-center construction boom. But now, steelmakers are warning of a high-stakes competition with their data-center customers for a commodity they both require: electricity.

Data centers' insatiable demand for electricity is driving up power costs for steel companies by tens of millions of dollars a year and threatening the companies' operations, according to a new report from the Steel Manufacturers Association.

"We as an industry are very reliant on electricity to make steel," said Rob Simon, chief executive of JSW Steel USA, which uses an electric furnace at its Mingo Junction, Ohio, plant. "We've had stable electricity prices for decades, and now we think that's at stake."

Take Canton, Ohio-based Metallus, which melts scrap in an electric furnace to make its steel bars and other specialty steel products. The company said its electricity costs are about 70% higher since 2024, with annual increases running at about $15 million.

"This path is not sustainable," said Kris Westbrooks, Metallus's chief operating officer, in testimony submitted last week to the Congressional Steel Caucus, made up of members of Congress from steelmaking states.

Both companies' plants are served by PJM Interconnection, the largest regional power grid in the U.S. Its area, which covers 13 states from the Midwest to the mid-Atlantic region, is also home to the country's largest concentration of steel mills with electric furnaces. PJM said wholesale power costs in the region were up 76% in the first quarter from a year earlier.

Those increases coincide with the rise of data centers, which have voracious electricity needs. By 2030, data centers could use 9.5% to 15.3% of the electricity in the U.S., according to a new forecast by the Energy Department's Lawrence Berkeley National Laboratory.

PJM forecasts that demand for electricity in its territory will outpace supply by 6.6 gigawatts beginning in 2027 — the equivalent of about six or seven nuclear power plants.

Steel-industry executives warn that sporadic production outages are becoming more likely. That risk could intensify if power shortages force utilities to prioritize data centers, which require uninterrupted power, over steel mills, which can temporarily shut down.

Meanwhile, the data-center industry needs steel.

Data centers are consuming about 1 million tons of steel a year, valued at about $1.4 billion, according to analysts' estimates. Construction spending on data centers in April was up 28% over the past year to a seasonally adjusted annual rate of $50.7 billion, according to the Associated Builders and Contractors trade group.

The often-expansive data-center buildings typically have steel frames made up of wall pillars, roof joists and roof sheeting. The thousands of servers inside are housed in steel racks.

Electric arc furnaces are now the predominant method for making steel in the U.S. The process caught on in part because electricity in the U.S. was cheaper than in most other countries. An electric furnace steel mill consumes 40 megawatts to 200 megawatts of electricity during the course of a day, with power usage rising or falling based on the flow of steel production.

PJM is expected to take the unusual move of conducting a supplemental power auction with electricity generators in September to make up for earlier auctions that failed to attract enough electricity to supply the region's needs. Analysts expect power suppliers to offer their electricity at record-high prices; those higher costs are expected to turn up on bills for new and existing large-load consumers starting in a couple of years.

"Overall, the supply dynamics are incredibly tight," said Hannah Rogers, senior associate for business consulting firm Capstone. "As there are more and more data centers, we're expecting to see a continued increase in the cost."

Steelmakers have said the expected increases in electricity costs will drive up production costs. Passing along higher power costs to customers will be difficult when supply contracts are typically pegged to market prices for steel.

"In the steel industry, our margins are so thin we can't pass along two-times or three-times higher manufacturing costs," said Brandon Farris, vice president for the Steel Manufacturers Association, a trade group for electric-arc-furnace steelmakers.

The steel association wants Congress and the Trump administration to deploy a set of emergency policies to relieve the pressure on the power supply, starting with delaying the retirements of older power-generating plants.

New plants aren't adequately replacing the electricity lost when older generating plants close, the group said. Steel manufacturers want the state and federal governments to streamline the permitting process for new power projects. Permitting is now running at an average of 4 1/2 years, according to the group.

"We need every kilowatt and every megawatt we can get," Farris said.

Write to Bob Tita at robert.tita@wsj.com