Why Mexican drug-traffickers started smuggling iron ore to China

The Economist explains

Mar 9th 2014, 23:50 by H.T. | MEXICO CITY

http://www.economist.com/blogs/economist-explains/2014/03/economist-explains

The Economist

IT IS big, bulky, you can’t snort it, and it doesn’t get you high. Per tonne, it sells for about $125, compared with cocaine, which fetches at least $50m wholesale. By any reckoning, iron ore would seem like a daft thing to peddle if you were in the drugs trade. Yet on March 3rd Mexican authorities seized nearly 120,000 tonnes of it near the port of Lázaro Cárdenas on the Pacific coast. Much of it they reckon was due to be smuggled to China by the Knights Templar, a bloodthirsty drug-trafficking outfit. Officials say that the business had become even better for the Templars than drugs.

How can there be so much money in selling such a dull commodity—even to the Chinese, who seem to be addicted to the stuff? The simplest answer is that this is no ordinary business. For years, Michoacán, the state where Lázaro Cárdenas is located, has been lawless. Even though the port is the biggest on Mexico’s Pacific coast, the area surrounding it has been a battleground for drug gangs fighting over its strategic location. The Templars, who in recent years won the turf battle, took advantage of the fact that Michoacán is Mexico’s biggest producer of iron ore. Officials say they muscled in and forced the local mine bosses, some of whom are Chinese, to pay from $4 to $7 per tonne of mineral extracted. By some accounts, they also sent shipments of iron ore and other minerals to China themselves, including gold, which was hidden in containers. In return, the Chinese have sent chemical precursors for making synthetic drugs. With iron ore shipments from Lázaro Cárdenas rising to 4m tonnes last year from 1.5m previously, the bonanza was reckoned to be worth many millions of dollars.

But the main reason it started to predominate was because smuggling drugs is more complicated than it looks. Lázaro Cárdenas is an entry point for South American cocaine, as well as precursors, and an exit route for drugs crossing the Pacific. So it is highly prized by drug cartels. Those that covet it most are the ones playing in the big leagues of international narcotics. Since 2011, one gang has dominated that trade: the Sinaloa cartel, run until his capture on February 22nd by Joaquín “El Chapo” (“Shorty”) Guzmán. With acute business acumen, and the usual cocktail of corruption, coercion and killing, it extended its tentacles to North and South America, Asia and Europe, erecting lethal barriers to entry along the way. Analysts say regional groups like the Templars were forced to develop a working relationship with the Sinaloans without challenging their hegemony. Instead, they opted to make money from the retail drugs trade, and ancillary businesses like kidnapping and extortion, but it was iron ore that gave them the most valuable hard currency.

In recent weeks, however, two things have changed. First, the Templars are on the run. Since November, when the Mexican Navy seized the port of Lázaro Cárdenas, the Templars appear to have lost control of their biggest business. They have also been hounded out of the region by armed vigilantes, backed by federal forces. This latest seizure of iron ore may represent the fag end of a dying criminal enterprise. Secondly, “El Chapo” has been jailed, and the authorities are trying to dismantle the Sinaloa cartel before it reinvents itself under new management. It may well survive Mr Guzmán’s capture. (As the New York Times memorably quoted, “If the CEO of McDonald’s was arrested today, you could still buy a hamburger in Tokyo tomorrow.”) But for the first time in several years, its control over a global drugs network is in jeopardy. If that flushes other wannabe kingpins out, expect them to go back to selling things you can stick up your nose, not into a blast furnace.