LAZARO CARDENAS, Mexico (Reuters) — 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 steelmaking center, 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 harbor 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 Nov. 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 tons by
October from 1-1.5 million tons 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 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 ton, giving him a profit of about $5-7 per ton. By the time it
reached China, the buyers could expect to sell the ore for a profit
of around $15 per ton, 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.
The combination of organized crime and Chinese buying of Mexican
iron ore poses a problem for President Enrique Pena Nieto, who has
gone out of his way to cultivate ties with China.
China's President Xi Jinping has been in office only since March,
but Pena Nieto has already met him three times. In June, Pena Nieto
welcomed Xi to Mexico, signing a string of economic cooperation
deals. But at the top of the agenda was how to narrow the massive
trade imbalance between the two nations.
Bilateral trade was worth $62.7 billion in 2012, up from just $431
million two decades ago, Mexican data shows. But 90 percent is
accounted for by Chinese exports to Mexico, most of it goods such as
computers and component parts.
CHAOS, LOCKDOWN, MORE CHAOS
Much of that trade goes directly through Lazaro Cardenas.
In 2012, it had the biggest rise in traffic in North America's 20
top container ports, handling 1.2 million 20-foot equivalent units,
or teus.
Most of the port is still a dusty plain above which birds of prey
soar in stifling heat. In a few years, though, projects started by
Maersk-unit APM Terminals and Hutchison Port Holdings could expand
its capacity to about 8 million teus — the amount moved in 2012 by
the continent's top container hub, Los Angeles.
But Michoacan is not California.
Seven years ago, then-President Felipe Calderon began a nationwide
crackdown on organized crime in Michoacan, sending in the army to
tackle increasingly violent drug cartels.
Over 80,000 people have since died in gang-related killings across
Mexico, and assurances Pena Nieto gave that he would stop the rot
when he took power a year ago are wearing thin.
Although parts of Mexico have become safer since Pena Nieto took
office, Michoacan has fallen into even more chaos.
Over half of the state lives in poverty. Traditional work like resin
production is dying out due to competition from China and elsewhere.
That creates new recruits for organized crime.
In October, a local bishop likened Michoacan to a failed state. A
few days later, assailants temporarily knocked out power for
hundreds of thousands in the state with a string of attacks on
installations of the national electricity utility.
Many blamed the Knights, though signs posted in Michoacan accused
a small rival gang of staging the attack.
The Navy took over the port authority and reinforced Lazaro Cardenas
shortly afterward. All the local police and customs officials were
initially suspended and the caravans of trucks carting ore started
to thin out.
But the lull is unlikely to last unless the government can regain
control of the city beyond the port gates and open up mining to
legitimate prospectors not controlled by the gang.
Miners complain that the main concession-holders such as
ArcelorMittal, which did not respond to requests for comment, use
only a fraction of their land and are reluctant to let others mine
it. The Knights have turned that dispute into money.
Days after the Navy moved in, state governor Vallejo said criminal
enterprise around Lazaro Cardenas could be worth up to $2 billion a
year — or about half Michoacan's 2012 budget.
"EVERYONE IS PAYING"
Some involved in the mining industry say the area has become safer
since the Knights Templar started to take control.
But the facts suggest otherwise: government figures show kidnappings
in Michoacan reached a record level in 2013, and murders climbed to
a 15-year peak.
Gomez has appeared in several YouTube videos trying to portray his
Knights Templar as defenders of Michoacan.
In one posted in August, he said the Knights had provided paid
protection at the request of avocado farmers but that they did not
extort businesses. However, he also conceded that some "foolish"
members of his gang probably had engaged in extortion.
The Knights' power in Lazaro Cardenas is often subtle.
Unlike parts of northern Mexico living under the threat of violence,
the restaurants, taco stands and bars on the city's main palm-lined
boulevard are alive with people as night falls.
Some residents say they are not squeezed by the cartel, and big
companies say they can operate without fear of extortion.
"We don't pay a cent to anyone," said Jose Zozaya, head of Kansas
City Southern Mexico, which operates the rail link that connects the
port with the United States.
But others quickly vent their anger about the Knights.
"Everyone is paying, but they won't tell you," said a local
entrepreneur. "The people here are destroyed."
The port is no stranger to crime, and during Calderon's presidency
it became a big entry point for chemicals from China and other parts
of Asia used to make methamphetamine. Some locals say chemicals have
even been used to pay gangs for the iron ore.
Asked if Mexico had discussed the iron ore issue with Beijing, a
senior government official said: "The Chinese government doesn't
always know what the companies are doing. The occupation of the port
... was the control measure adopted."
Hua Chunying, a Chinese foreign ministry spokeswoman, said she was
unaware of the situation in Lazaro Cardenas, adding: "But I can tell
you that the Chinese government has consistently educated and asked
Chinese companies to respect the law in other countries when they
carry out business and trade cooperation."
Successful Chinese firms are growing quickly in the region.
Since setting up in 2009, Desarrollo Minero Unificado de Mexico (DMU),
a Chinese iron mining company in Lazaro Cardenas, has gone from
three employees to 600 nationwide, nearly all of them Mexicans,
Director General Luis Lu told Reuters.
With more than 30 concessions, Lu said his company mined all of its
own iron and had not had any trouble with organized crime. He said
he could not say how other Chinese firms fared.
Still, Chinese success in Michoacan has caused friction with the
Knights Templar. In the August YouTube video, gang leader Gomez had
some strong words for them.
"We have an excessive invasion of Chinese. An excess of Chinese," he
said, surrounded by armed men. "It may suit the interests of various
corporations, I don't know. But they're here with us now. And these
people have their mafias too."
(Additional reporting by Ben Blanchard
and David Stanway in Beijing; editing by Kieran Murray and Dan
Grebler)
