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Those scruffy Dwarves
It seems that the Valar had a limited power to create a "form" of life, but not "sentient life". The completion of life and its imbuing of sentience and individual spirit and initiative is Eru's prerogative, as exampled by the creation of Dwarves through the presumption of Aule. The book says that they moved and resembled the living while Aule's will was bent upon them, but that they stood idle when his attention was away. Upon Aule's prayer, Eru Iluvatar gave them complete sentience and volition.
The fact that there were sentient trees, animals, and other such non-humanoid life, therefore, appears to be life "sanctioned" by Eru, and not purely the creation of their respective Valar. In other words, they were "authorized life" to whom Eru gave a spark of existence upon their creation by his children the Ainur.
Orcs and Trolls, were a "twisting" of existing life by Morgoth and crew. Balrogs were the seduced Maiar spirits of Fire. And such creatures as dragons and giant spiders were the horrid manifestation of "other" Maiar life not in the fold of the original Valinorean hosts. So there is a variety of "Life", as it were, but none were truly the pure creation of the Valar, since they were given no such authority and prerogatives by Eru.
Even when "singing" Middle-Earth into being, they marveled at the vision that later unfolded after their tune, each being but a part of the whole as Eru gave them their specific inclinations. Therefore it seems likely that, while they had the power to create, they didn't have a clue what they were creating, and that Eru gave each segment it's life as it was being sung. So the initiative for life always rests within Eru.
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