: When the Orcs of the High Pass kidnapped Thorin and Company in THE HOBBIT Gandalf seems to have used gunpowder, and Saruman used a "blasting powder" to break through at one point in the battle of the Hornburg. Sauron's army from Minas Morgul also blasted breaches in the Rammas, the wall around the Pelennor fields, although Tolkien doesn't say how the blasts were effected.

If gunpowder,or similar substance, did exist in ME, who invented it? My best choice would be the Dwarves. Perhaps it was created as a tool for use in mining or dwelling construction. It could also have played a key part in the waking of the Balrog in Moria.
Dwarves as the inventors could also explain its lack of wide-spread usage. If it were used only in construction or for celebrations, using it as a weapon would not be considered. The Chinese and gunpowder is a good example of this. Since Dwarves did not readily share the secrets of their crafts, except for rare exceptions the knowledge would remain with the Dwarves. Since Gandalf had contacts with Dwarves, Thorin etc, this could explain his knowledge. Sauron,or his servants, could have aquired the knowlege from Dwarves ensnared by the Rings. Saruman could have discovered the secret through his studies of lore, or from one of Sauron's servants.