Mexico’s Antidrug Push Weighs on Iron-Ore Trad

Mexico’s Antidrug Push Weighs on Iron-Ore Trade With China
Mexico’s Total Iron-Ore Exports Likely to Fall 80%
Mexican authorities on a ship where they confiscated iron ore extracted illegally by the Caballeros Templarios cartel on April 30, 2014. ENLARGE
Mexican authorities on a ship where they confiscated iron ore extracted illegally by the Caballeros Templarios cartel on April 30, 2014. European Pressphoto Agency
By
Chuin-Wei Yap
Updated Oct. 21, 2014 5:25 p.m. ET
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TIANJIN, China—Mexico’s exports of iron ore have plunged in the wake of a bid by authorities to break the grip of drug cartels on parts of the country’s iron-ore industry, a Mexican official said.

Mexico will likely export just 2 million metric tons of iron ore this year, in part because of a crackdown on cartel-linked shipments to China, Mario Cantú, Mexico’s coordinator general of minerals, said on the sidelines of an industry conference in the northeastern Chinese city of Tianjin. Last year, Mexico exported about 10 million tons of the mineral, 9 million of which were bound for China.

It isn’t clear the extent to which exports specifically to China will drop this year, Mr. Cantú said, but the decrease will likely correspond with the 80% drop in total Mexican iron-ore exports.

The export collapse is linked to Mexico’s moves to combat drug cartels operating in the country’s top ore-producing state, Michoacán, and their expansion into lucrative shipments of the mineral to China, the world’s biggest buyer of iron ore.

In addition to confiscating iron-ore that officials said was linked to drug cartels and closing facilities where the mineral was processed, Mexican authorities this year introduced a new export permit aimed at curbing illegal shipments. Last November, the Mexican navy also seized control of Michoacán’s port of Lázaro Cárdenas, Mexico’s largest in terms of tons of cargo, in a bid to cut funding to the Knights Templar, a drug cartel that exerted significant control over the economy in much of the state.

Lazaro Cardenas has long been an entry point for chemicals used in the manufacture of methamphetamines by the Knights Templars. It has also been a gateway for iron-ore exports linked to the drug traffickers, which in recent years have seized control of many iron-ore mines that were shipping the mineral to China. “We realized some of the minerals have been exploited without permits. That led us to change the rules,” Mr. Cantú said.

In March, Alfredo Castillo, a special presidential commissioner for Michoacan, told the Associated Press that illicit ore shipments from the port had become the Knights Templar’s principal source of revenue.
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Mexico isn’t traditionally a major producer of iron ore. But until the crackdown, it was among a swatch of small-volume mining countries that China was increasingly cultivating as alternative resources to large global miners.

Drug cartels in Michoacán had begun to diversify into mining as a new revenue stream and way to develop a source of hard currency, said Armando Pérez Gea, general manager of Mexico’s Secretariat of the Economy. Some local iron mines were owned by Chinese, and drug organizations including the Knights Templar began to funnel funds through the ore trade via Chinese ships to China.

Mexico’s war on the drug trade, which the U.S. has also sought for decades to help stamp out, has increasingly forced traffickers to focus on auxiliary businesses that can serve as a means to mask drug-related proceeds, provide their own profit margins and act as a barter for the ingredients needed to manufacture some synthetic drugs including crystal methamphetamine, analysts say.

Mexico may not be impacted as much by the falling ore exports as it would have been in prior years. Iron-ore prices this year have fallen to levels not seen since 2009, largely caused by China’s economic slowdown. Prices for the seaborne material are down 40% since the start of the year, according to data from data provider The Steel Index.

The officials say the government is willing to stomach the steepness of Mexico’s iron-ore export rout. “It’s dropped drastically in a year—but what we want is a healthy business,” Mr. Cantú said.

Mr. Pérez Gea cautioned that not all of the China-bound Mexican ore was linked to the drug trade and said Mexico was working with the Chinese authorities to resolve the situation. Five Chinese ships were investigated and one of them is being held under a probe linked to the bust, Mr. Cantú said. No Chinese person has been charged. Mr. Pérez Gea also said Mexican demand for ore remains vibrant.

Mr. Cantú said Mexico’s new permit system will likely be put in place next month. The government aims to closely supervise the export process for iron ore.

—José de Córdoba
contributed to this article.

Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com