Growing inventories, reduced demand, and pricing pressure are going to take their toll on every company in thesolarindustry -- but some firms are more vulnerable than others.

Renewable Energy Corporation (REC) has said it will scale back its photovoltaic production activities due to weak market demand. Around 500 employees are expected to be affected with what the firm called "temporary layoffs."  REC intends to halt production at its solar cell plant in Narvik, Norway.

REC has shut off capacity temporarily in the past during a similarly difficult quarter for the industry in Q2 2009.

The Norway-based vertically integrated solar said that it will reduce production of its solar cells, wafers and modules as of July 1 in "response to the current market conditions." It added that it expects its second quarter operating results to be reduced to a level "well below" the first quarter of the year.  REC went on to say that average selling prices for polysilicon were fairly stable, but the average selling prices for wafers and modules were down four percent compared to the previous quarter.

In a statement, the company said: "REC will initiate a process with the trade unions, with the intention to halt production at the oldest wafer plants at Herøya, Norway, and at the solar cell plant in Narvik, Norway."

Wafer production is expected to be reduced by 125 megawatts in the third quarter of this year, which represents 30 percent of its Norwegian wafer capacity. Cell and module production will be reduced by approximately 50 megawatts in the same period. The company added that REC-branded modules will not be manufactured under contract by third parties in the third quarter.

Renewable Energy Corporation (REC) reported decreased revenues due to weakened demand in the first quarter of 2011. 

This was a difficult quarter for the solar sector and Q2 might have its share of difficulties, as well. The solar market is going through a rocky stretch. The cap on Italy's incentives in the world's second-largest solar market has slowed the growth of the EU market. And that slowdown has impacted the first quarter performance of solar giants like Trina Solar (NYSE:TSL), Yingli Green Energy (NYSE: YGE), SunPower, and even the mighty First Solar (Nasdaq: FSLR).  Shares of First Solar, Suntech, SunPower (Nasdaq:SPWRA), Trina, and Yingli Green have taken a hit.  JA Solar, the second-largest maker of solar cells, expects the second quarter to be soft.

GTM Research's Shyam Mehta, Senior Solar Analyst, noted that the driving force behind demand softness is the confusion about the fate of the Italian FIT program and the inability of Germany to pick up the slack as a market of last resort in the interim.

Mehta adds, "At this point, the wafer market is dominated by large Chinese players like LDK, Renesola, and GCL-Poly, whose cost structures are substantially better than those coming out of REC's facility in Norway, and the differential will only increase over time -- I don't see wafer production for external purchase being a viable business for Western producers unless you have a product that is technology-differentiated (string ribbon wafer, ultra-thin wafer, kerfless wafering, etc). A down quarter for the industry will almost always put these producers under severe stress. REC knows this -- its future plans have an increasing proportion of wafer, cell, and module output coming out of the new plant in Singapore, which has a substantially better cost structure. It is not inconceivable that REC would permanently shut down the Norway facility sometime soon. The problem, however, is not simple economics -- they would need to successfully negotiate this with the trade unions. A similar point holds for Q-Cells: they have a cell plant in Germany and Malaysia, and Malaysia is clearly the future. It's likely that Q-Cells would already have shut down the German cell plant absent the political complexities inherent in such a decision."