Investment in infrastructure, which the firm sees as the long-term solution to inflation, will rise from $1.25 trillion to $2.25 trillion annually over the next three years. And China, the Middle East, and Russia will account for 70% of infrastructure spending.

The report from Merrill Lynch pointed out that Xstrata PLC (OTC: XSRAY) recently predicted emerging markets would spend $22 trillion on infrastructure in the next 10 years.

“That estimate is among the highest we’ve seen,” the report noted, “with an implied run rate of $6.6 trillion over the next three years.”

Estimated Infrastructure Spending For the Next Three Years

China and the Gulf states, each with enormous cash reserves from trade surpluses, will be the two leading infrastructure investors according to Merrill Lynch.

China’s $78 Billion Reconstruction

Infrastructure spending in China hit the ground running in the past few years as the nation prepared to host the 2008 Summer Olympic Games. Beijing has already spent $40 billion on infrastructure, including a new airport terminal and subway lines, in preparation.

Unfortunately, the Olympic torch relay, which was meant to signify the country’s readiness for the Games, paused from May 19 to May 21, to mourn those killed in the massive earthquake.

Now, Beijing will be footing the bill for another massive infrastructure push – this time to rebuild much of the country, which will cost an estimated $78 billion. Of course, Chinese infrastructure companies are up to the task and well prepared for a sharp rise in demand for their products and services.

“It’s a sad thing,” Ma Chunji, the head of Sinotruk, the nation’s top truck manufacturer told the International Herald Tribune. “But it will stimulate demand.”

“Beijing planned originally to readjust the speed of growth and compress the size of infrastructure projects, and that would have affected us,” he added. “Now we face a positive.”

Obvious beneficiaries of the rebuilding effort include vehicle makers like Sinotruk, as well as cement and steel producers. In fact, Chinese industrial-production output rose 16% in May from a year earlier after gaining 15.7% in April, according to the nation’s statistics bureau.

Baosteel Group Corp., China’s leading steel producer was a big reason for the increase as it stepped up production of many specialized steel products for the rebuilding effort.

Baosteel finished its second batch of medical stainless steel on June 30th. So far, the company has produced a total of 33 metric tons of the specialized steel to be used in quake relief work and sent to relevant medical apparatus plants. Baosteel will also construct 10,000 square meters of buildings of color coated steel sheet for the city of Dujiangyan.

Beijing may also use the reconstruction effort as a chance to upgrade many of the country’s antiquated transportation and communications systems.

“Traditional communication systems have been seriously damaged in the earthquake, making us rethink the whole communications system,” Fok Tung Ling, chairman of the wireless equipment vendor Comba told the International Herald Tribune.

Xi Guohua, a senior industry regulator told the IHT that authorities are working on “combining the sky and earth,” building a wireless system with optical cable.

Also, a railway-building boom, similar to the one that took place in the United States in the 19th century, could arrive sooner rather than later.

That’s welcomed news to China Railway Group Ltd. and China Railway Construction Corp Ltd., which will be among the biggest winners, according to Barron’s.

Total investment in China’s railway sector is soon expected to reach $200 billion, with both companies well positioned for a big piece of the new business, as they control approximately 85% of China’s railway infrastructure market, Barron’s said.

Middle East Oil Oasis

In 2007, the six nations of the Gulf Cooperation Council – Saudi Arabia, Kuwait, Bahrain, Omar, Qatar and the United Arab Emirates – earned $381 billion from oil exports and that was before oil prices rocketed up to over $145 per barrel before dropping back to its current level of $135 per barrel.

The cumulative earnings of the Gulf States will reach into the trillions if oil remains over $100 for several more years.

There’s already an estimated $2.4 trillion in construction projects either underway or under development in GCC countries. And $1.4 trillion of that is earmarked for projects in civil construction.

Saudi Arabia, the world’s largest oil producer and exporter has put its petrodollars to work, embarking on a massive $460 billion construction program. According to the National Commercial Bank (NCB), Saudi Arabia has formally announced 576 separate projects, 70% of which are already well underway.