Mexican drug cartels looking to diversify their businesses long ago moved into oil theft, pirated goods, extortion and kidnapping, consuming an ever larger swath of the country's economy. This month, federal officials confirmed the cartels have even entered the country's lucrative mining industry, exporting iron ore to Chinese mills.
Such large-scale illegal mining operations were long thought to be wild rumor, but federal officials confirmed they had known about the cartels' involvement in mining since 2010, and that the Nov. 4 military takeover of Lazaro Cardenas, Mexico's second-largest port, was aimed at cutting off the cartels' export trade.
That news served as a wake-up call to Mexicans that drug traffickers have penetrated the country's economy at unheard-of levels, becoming true Mafia-style organizations.
The Knights Templar cartel and its predecessor, the La Familia drug gang, have been stealing or extorting shipments of iron ore, or illegally extracting the mineral themselves and selling it through Pacific coast ports, said Michoacan residents, mining companies and current and former federal officials. The cartel had already imposed demands for "protection payments" on many in the state, including shopkeepers, ranchers and farmers.
(Read more: Fed tapering could take iron ore to record highs)
But so deeply entrenched was the cartel connection to mines, mills, ports, export firms and land holders that it took authorities three years to confront the phenomenon head-on. Federal officials said they are looking to crack down on other ports where drug gangs are operating.
"This is the terrible thing about this process of (the cartel's) taking control of and reconfiguring the state," said Guillermo Valdes Castellanos, the former head of the country's top domestic intelligence agency. "They managed to impose a Mafia-style control of organized crime, and the different social groups like port authorities, transnational companies and local land owners, had to get in line."
Valdez Castellanos said that even back in 2010, the La Familia cartel would take ore from areas that were under concession to private mining companies, sometimes with the aid or complicity of local farmers and land owners, then sell the ore to processors, distributors and even, apparently, foreign firms.
Mexico's Economy Department said the problem was so severe that it prompted the government to quietly toughen rules on exporters in 2011 and 2012 and make them prove they received their ore from established, recognized sources.
(Read more: Iron ore prices set to rise despite China slowdown)
Many exporters couldn't. In 2012, the department denied export applications from 13 companies, because they didn't meet the new rules. And the problem wasn't just limited to Michoacan, or the Knights Templar cartel.
"Since 2010, evidence surfaced of irregular mining of iron in the states of Jalisco, Michoacan and Colima," the department said in a statement to The Associated Press.
"That illegal activity was encouraged by the great demand for iron by countries such as China, to develop their industries," according to the department."Many trading companies began to build up big stockpiles of legally and illegally obtained iron (ore), that was later shipped out for export."
A Mexican federal official, who was not authorized to speak on the record, said the cartels would use a combination of threats and outright theft to get the ore from mines. He said the nexus between the cartels and export companies was key.
(Read more: Mexican Drug Cartel Enters Coal-Mining Business)
"They extort the merchandise from mining companies and then export it through legal companies, or they rob trucks full (of ore) that later turn up in a legal manner, through a distributor, and export it," said the official. "The incredible thing is that they export it, these guys are exporting to South America and Asia."
Ofelia Alcala, a resident of the Michoacan mining village of Aquila, said that since 2012, the Knights Templar cartel demanded residents hand over part of the royalty payments from a local iron ore mine operated by Ternium, a Luxembourg-based consortium. Alcala, a member of a self-defense group that rose up in arms in Aquila this summer to kick the cartel out, said the cartel also had been hiring people to extract the ore without permits, and then exporting it through another Pacific coast port, Manzanillo.
"They weren't content with getting our money and robbing our trucks, so they began secretly extracting our minerals," Alcala said.
Ternium said in a statement that it has received reports of irregular mining near its operations in Aquila.
"Those have been passed on to the appropriate authorities," the company said in a statement.
Government figures show the amount of iron ore being exported to China quadrupled between 2008 and the first half of 2013, rising to 4.6 million tons per year, precisely during the period the La Familia cartel and later the Knights Templar cemented their control over Michoacan.
In 2008,Lazaro Cardenas handled only 1.5 percent of Mexico's iron ore exports to China;by mid-2013, the seaport was shipping out nearly half.
In 2010,the attorney general's office estimated the cartels shipped 1.1 million tons of illegally extracted iron ore abroad that year.
Officials said the export scheme may have involved other sea ports, and that more military takeovers may be necessary.
The cartel mining issue also resurfaced last year in the coal-mining state of Coahuila bordering Texas. The former governor, Humberto Moreira, called a press conference to claim that Heriberto Lazcano, leader of the Zetas cartel, was running illegal coal mining ventures and partnering with legitimate ones. So far, none of the accusations have been proven.
The only known arrests related to cartel mining operations occurred in Michoacan in 2010, when Ignacio Lopez Medina, an alleged member of La Familia, was accused of selling ore illegally to China, the federal Attorney General's Office said at the time.
But the arrest apparently came to little; the Attorney General's Office could not say whether Lopez Medina had been tried or convicted of that crime, nor could The Associated Press determine if he is represented by a lawyer or is still in custody.
The Chinese Chamber of Commerce did not immediately respond to requests for information on companies that have been involved in buying ore from cartels, knowingly or otherwise.
The Chinese Foreign Ministry declined to comment on whether China had any measures in place to ensure the legal provenance of such imports.
The iron ore, meanwhile, has both swelled the cartels' bankrolls, giving them more money to buy guns and bribe officials, and fed the hunger of Asian steel mills.
And it maybe a two-way trade: Precursor chemicals the cartel uses to make methamphetamines often arrive from China at both the Lazaro Cardenas and Manzanillo ports.
—By Associated Press.