Solar Results to Spotlight Italy Turmoil, Costs

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"Rising material costs and government cuts may upstage first-quarter numbers."

For solar panel makers, rising raw material costs and a looming cut in government support for solar power in Italy are likely to upstage first-quarter numbers, when the world's largest solar companies begin reporting their quarterly results next week.

For months, investors have fretted about an expected change in solar energy incentives in Italy, a market that exploded last year due to generous government support.

In 2011, however, the index is up more than 7%, in part because Italian demand for solar held up until recently.

"It's not going to be Armageddon this quarter," said Morningstar analyst Stephen Simko. "Next quarter will be the real telltale sign of where the industry is."

The Italian market has slowed in anticipation of the government's decision about a new solar subsidy scheme to begin in June.

As a result, price declines on solar panels have accelerated, and investors are eager to hear how companies plan to react to a softening of demand in Italy.

But as prices on panels drop, many in the industry are also grappling with a dramatic increase in the price of silver paste, which is used to manufacture solar cells.

To make matters worse, prices on the industry's primary raw material—polysilicon—have only recently retreated from their recent highs.

Moreover, companies with large exposure to Germany, the industry's biggest market, struggled during the first quarter with cold weather that made it more difficult to install solar systems.

Analysts expect domestic companies to suffer most from the demand drop in Germany, due to their high sales exposure, while those with a higher share in foreign markets will be bit less.

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