FRANKFURT - European solar equipment makers are slowly emerging from the crisis that has hit the sector, quarterly results will show, but the outlook beyond 2009 will be uncertain due to tight credit and oversupply.

Europe's solar companies are expected to show signs of recovery when third-quarter earnings kick off next week, with analysts expecting capacity adjustments and the shift of production abroad to benefit companies.

European solars, along with their U.S. and Chinese peers, have to deal with a toxic mix of oversupply of cells and modules as well as a credit squeeze that has triggered a wave of quarterly losses and outlook cuts in the funding-hungry sector.

In addition, Asian competitors that are producing at much lower prices have put heat on their European peers, which are burdened by high labor costs.

But the worst could be over for Europe after companies wrote down the value of their inventories, slashed jobs and shifted production abroad in a bid to stay competitive.

Q3 reporting should give a strong indication for a recovery of the European solar manufacturing industry, which has been hit over-proportionately hard during the latest crisis, Oppenheim Research analysts wrote.

Analysts say this will be reflected in short-term outlooks of companies such as Norway's Renewable Energy Corp (REC), which will report on October 27, as well as German solar cell maker Q-Cells, SolarWorld and module maker Solon, all due to report in mid-November.

An expected year-end rally and stable pricing for German players should lead to a stronger quarter and therefore positive outlook statements for Q4 2009, UniCredit analyst Michael Tappeiner wrote.

This contrasts with U.S. peers such as SunPower Corp and Akeena Solar Inc that disappointed investors on Thursday by offering little hope for a market recovery this year at the same time as they topped Wall Street estimates.

Eyes will also be on U.S. solar company First Solar -- expected to become the world's biggest maker of solar cells this year -- which is scheduled to report results on October 28.

PRESSURE THROUGH 2011

European solars such as Q-Cells and REC have set up production plants in Asia or are in the process of doing so, to cope with high labor costs vis-a-vis their Asian peers.

We thus see the pendulum starting to swing back into the direction of the Europeans, Oppenheim Research analysts wrote.

But outlooks for European players beyond 2009 are expected to be cautious as Germany, the world's largest solar market, is considering cutting feed-in tariffs -- the lifeline for solar companies until grid-parity is reached -- for some solar systems.

End market trends for the solar PV (photovoltaic) industry indicate ASP (average selling prices for solar systems) pressure through 2011 ... We believe that producers need to drive down production costs significantly to preserve margins and stay in business, Deutsche Bank analysts wrote in a note.

Although all European solar companies are expected to deliver some good news, whether it be in earnings, outlook or both, analysts believe that the third quarter went better for solar downstream players compared with their upstream peers.

Solar downstream players -- installers and sellers of solar systems and those with direct customer access such as Phoenix Solar and Aleo Solar -- have already performed better than upstream players, the makers of modules and cells such as Q-Cells and REC, that were hit harder by price decreases.

Phoenix Solar, which reports Q3 results on November 12, is expected to show a strong pick-up in demand, especially in the residential market, and a return to profitability after breakeven Q2, Goldman Sachs analysts wrote.

Downstream players will, in our view, show the best quarter-on-quarter improvement driven by a healthy volume rebound, UniCredit's Tappeiner said.

(Reporting by Christoph Steitz; Editing by Jon Loades-Carter)

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