When the leaders of Mexico and China met last summer, there was much talk of the need to deepen trade between their nations. Down on Mexico’s Pacific coast, a drug gang was already making it a reality.
The Knights Templar cartel, steadily diversifying into other businesses, became so successful at exporting iron ore to China that the Mexican Navy in November had to move in and take over the port in Lazaro Cardenas, a city that has become one of the gang’s main cash generators.
This steel making centre, drug smuggling hot spot and home of a rapidly growing container port in the western state of Michoacan occupies a strategic position on the Pacific coast, making it a natural gateway for burgeoning trade with China.
Lazaro Cardenas opened to container traffic just a decade ago, and with a harbour deep enough to berth the world’s largest ships, it already aims to compete with Los Angeles to handle Asian goods bound for the U.S. market.
But that future is in doubt unless the government can restore order and win its struggle with the Knights Templar, who took their name from a medieval military order that protected Christian pilgrims during the Crusades.
Mexico’s biggest producer of iron ore, Michoacan state is a magnet for Chinese traders feeding demand for steel in their homeland. But the mines also created an opportunity for criminal gangs, such as the Knights Templar, looking to broaden their revenue base into more legitimate businesses.
“The mines were mercilessly exploited, and the ore was leaving. But not in rafts or launches – it was going via the port, through customs, on ships,” said Michoachan’s governor, Fausto Vallejo, soon after the Navy occupied the port on November 4.
Already a thriving criminal enterprise adept at corrupting local officials and squeezing payments from businesses, developers and farmers, the Knights took to mining with aplomb, according to entrepreneurs and miners working around the port.
Hidden behind mountain roads about an hour from Lazaro Cardenas, one small town mustered hundreds of trucks this year to lead the gang’s scramble to the port, a local miner said.
That town – Arteaga – is the birthplace of Servando Gomez, the former school teacher who leads the Knights Templar.
Gomez understood the potential of Lazaro Cardenas, which was a village best known for its coconuts until the government decided to build a steelworks there 40 years ago.
The gang’s trucks sped around Michoacan’s iron mines to supply Chinese buyers, helping to push ore exports to 4 million tonnes by October from 1-1.5 million tonnes a year previously.
Their business rests on several pillars, according to accounts of local officials, miners and entrepreneurs.
Firstly, the Knights controlled how the ore moved, having imposed protection charges on local transport unions after becoming the dominant gang in the city a few years ago.
It also helped local prospectors stake claims to mine areas either unclaimed by others or beyond the control of the existing concession-holders. Then the Knights took their cut.
Finally, the gang pressured customs officials to ensure the ore passed through the port smoothly.
“Most of the groups mining are Knights Templar or belong to them. They have the whole chain,” a local official told Reuters.
Fueled by the appetite of Chinese buyers, about half the mining in the area was done without proper permits this year, said the official, speaking on condition of anonymity.
Those who talk openly can pay dearly. In April, an official at steel maker ArcelorMittal <ISPA.AS> who local businessmen said had reported illegal mining to authorities was shot dead.
One prospector from Arteaga, who asked to remain anonymous, said he ran a mine selling unprocessed iron ore to Chinese traders for $32 per tonne, giving him a profit of about $5-7 per tonne. By the time it reached China, the buyers could expect to sell the ore for a profit of around $15 per tonne, he estimated.
Because the Knights Templar control much of the local iron supply, the gang has pressured Chinese buyers to purchase ore from them or face reprisals, said a Mexican government security official who spoke on condition of anonymity.